The Pound-to-Dollar Rate: Week Ahead Forecast

Charts indicate an upside bias for GBP/USD at the start of a new trading week having recently vaulted a zone of resistance but much will depend on the outcome of UK inflation and retail sales data.

The Pound-to-Dollar exchange rate is quoted at 1.3735 at the time of writing confirming Sterling has indeed cleared a zone of resistance between 1.3600 and 1.3700. This development suggests upside momentum is building and we would suspect the exchange rate is likely to continue rising to its next upside target at 1.3800 where we expect a good layer of sell orders.

Studying the charts in more detail, the pair is probably in a strong uptrend as it has broken above the key September highs, and the R1 and R2 monthly pivots with relative ease, a sign buyers are in the ascendancy.

Pivots are often points of reversal for prices and attract short-term technical traders who trade against the direction of the main trend, which often leads to pull-backs in the price, however, the strong bullish rally appeared to overcome these shorts (downside bets).

There is a possibility the exchange rate could momentarily pullback to 1.3700 in a throwback move before continuing higher, however, this minor pull-back is unlikely to change the overall direction of the uptrend, and we see a probable move up to 1.3800, re-confirmed by a break above the 1.3743 highs.

A further move above 1.3810 would then probably confirm a continuation up to the next major round number at 1.3900, where the trend could stall again as traders often take profits at round numbers, increasing supply at them.

The chart of GBP/USD has an overall bullish look and feel now that the exchange rate has successfully broken above the major trendline drawn from the 2014 highs and remains above the minor trendline drawn from the 2017 lows - both medium-term bullish indications in themselves.

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Data and Events for the Pound

The key data release for the Pound is inflation data out at 09.30 on Tuesday, January 16, which is forecast to ease to 3.0% compared to the same time in the previous year, from 3.1% in November.

Core inflation is likewise forecast to ease to 2.6% from 2.7% previously.

A higher-than-forecast print will probably strengthen the Pound as it will increase pressure on the MPC to increase interest rates in order to try and limit future inflation levels.

Higher interest rates are positive for currencies because they draw greater inflows of foreign capital with the promise of higher returns.

Analysts at TD Securities are marginally more hawkish, expecting inflation to remain at 3.1% and not fall back in December.

"Our 3.1% forecast for headline CPI is just above the top of the BoE's target range and well above the BoE's forecast of 2.7% from the Nov Inflation Report. Core CPI should soften by a tenth, but the big jump in energy prices into the end of the year will keep the headline well-supported," say TD Securities in a note to clients ahead of the new week.

Friday sees the release of retail sales data which often moves Sterling as it gives an insight into the health of the UK consumer.

The UK economy is heavily reliant on the retail sector and should data beat expectations we would expect some positive response in Sterling.

The bar is actually set quite low for a positive surprise as monthly retail sales for December is forecast to show a decline of 0.6%, a slowing from then previous month's growth of 1.1%.

Monday sees the Bank of England in focus with a speech from Silvana Tenreyo (above), the new member of the Bank's Monetary Policy Committee (MPC), at 18.15 GMT on Monday, January 15.

Not long after she first joined the BOE back in October 2017 Tenreyro said she would want to see UK employment improve and wages rise further before advocating raising interest rates - a move which would be bullish for the Pound.

"Silvana Tenreyro, an external MPC member, said she would need to see more evidence of the elimination of slack in the labour market before voting for a rate rise," says Chris Giles, Economics Editor at the Financial Times.

Yet the unemployment rate has not fallen since she said those comments and instead has stayed the same at 4.3% since September 2017, so assuming this is still her view, we do not expect her to talk up interest rates on Monday, which is on margin negative for Sterling.

UK Unemployement has stayed at 4.3% (Image Courtesy of tradingeconomics.com)

Data and Events for the Dollar

Fiscal risks may permeate the market agenda in the coming week as the US government starts to run out of money again and its accumulated debt reaches precariously close to the last agreed debt-limit.

"Risks of a week-ending US government shutdown appear to be rising. A can-kick puts the next deadline dangerously close to the debt limit, which could increase dislocations in the bill market as last summer," says Canadian investment bank TD Securities.

The impact of rising concerns would be negative for the Dollar, especially with recent jitters over the sustainability of foreign demand for US debt.

Watch for, "An acrimonious split, especially among Republicans," says TD, as this would  "create market uncertainty around the 2018 Trump agenda and the midterm elections."

New York Empire State Manufacturing is out at 13.30 GMT on Tuesday, December 16, and will be instructive in providing a leading indication of how conditions are evolving in January.

Current expectations are for no-change from the 18.0 result in December.

Philidelphia Fed Manufacturing for January, meanwhile, is out on Thursday at 13.30 and forecast to actually show a fall to 25.0 from 27.9 previously.

"The results of the New York Fed’s Empire index (Tuesday) and the Philadelphia Fed’s index (Thursday) will provide us with preliminary indications of the strength of the manufacturing sector in January," says Desjardin, Senior Economist, Hendrix Vachon.

On Wednesday evening there is commentary from Federal Reserve speakers, Mester, at 21.30  who is a hawkish voting member, and Kaplan at 20.15 who is not.

Also out on Wednesday is the Fed's Beige Book, which is an update on economic conditions throughout the US and is a useful gauge for assessing the Fed's outlook.

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