Pound-to-Dollar Rate Forecast for the Week Ahead

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The Pound rate appears to be reversing its trend higher against the US Dollar and is in danger of moving lower.

The Pound-to-Dollar exchange rate has formed what is called a double-top reversal pattern at the January highs (see chart below) which consists of two peaks, one after the other, in a pattern which looks similar to a letter 'M'.

The double-top often indicates that an exchange rate is nearing the end of an uptrend and the start of a new downtrend.

The confirmation of more downside comes from a break below the intervening trough lows of the double top, which in this case was the 1.3979 lows.  

The extent of the move lower is usually determined by the height of the double top extrapolated lower from the neckline.

We have calculated a downside target just above the 50-day moving average (MA) at 1.3680.

This is slightly above the target generated by using the height of the double top (at 1.3650), because the 50-day MA is expected to act as a formidable obstacle to further downside and therefore provides a natural break to falling prices.

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Data and Events for the Dollar

Inflation, retail trade, and the Michigan sentiment survey will be the main releases for the Dollar in the coming week.

Headline inflation is scheduled for release on Wednesday, February 14, at 13.30 GMT, and is forecast to show a 1.9% rise in January from a year ago, down slightly from 2.1% in December.

On a monthly basis, it is forecast to show an accelerated 0.3% rise against the 0.1% in the previous month.

Core inflation is forecast to show a 1.7% rise from 1.8% previously.

Inflation is a driver of interest rates which in turn influence currencies, so a rise in inflation will strengthen the Dollar.

The reason for this is that higher interest rates draw greater inflows of foreign capital attracted by the promise of higher returns.

Retail Sales for January are released at the same time and are forecast to show a 0.5% rise on a monthly basis from 0.4% previously.

On a year-on-year basis, analysts will be looking to see if it can continue the strong gains seen in December when it rose by 5.4% compared to December 2016.

Finally, Michigan consumer sentiment in February is released at 15.00 on Friday, February 16, and is forecast to fall slightly to 95.5 from 95.7 previously.

Data and Events to Watch for the Pound

From a data perspective inflation and retail sales, releases dominate the outlook for the Pound in the week ahead.

Inflation is a driver of interest rates which in turn influence the Pound, so a rise in inflation will lead to a stronger Pound. On

Thursday, February 8 the Pound rallied as the Bank of England communicated that interest rates might have to rise faster than previously anticipated in coming months in order to combat persistently high rates of inflation.

The Bank and markets alike will, therefore, be watching the latest installment in UK inflation data to see where the trends lie, the release is due out on Tuesday, February 13, at 9.30 GMT.

Forecasters expect a 2.9% rise compared to a year earlier (yoy); in the previous month of  December, the inflation rate was a higher-than-expected 3.0% (yoy).

On a monthly basis, inflation is expected to decline by -0.6% in January.

Core inflation, which strips out volatile food and fuel components, is forecast to rise by 2.6% compared to 2.5% previously; often it is this number that moves markets.

On all accounts, should the data come in below expectation we would expect Sterling to decline, and should data beat expectations we would expect Sterling to rise.

The other main release is retail sales, which is scheduled for release on Friday, February 16, at 9.30.

A higher-than-expected result could reaffirm the UK economy's resilience and support Sterling.

Retail Sales is forecast to rise by 2.6% in January compared to a year ago when it only gained by 1.4%. Month-on-month it is forecast to increase by 0.5% from -1.5% previously.

Kathy Lien, managing director of BK Asset Management, forecasts lower-than-expected inflation and retail sales data, which could weigh on the Pound.

"Looking ahead, the UK's inflation and retail sales reports are scheduled for release and if the data surprises to the downside like we expect, it may be difficult for GBP to rally," says Lien. 

Data aside, the other major factor for Sterling in the coming week is likely to be how Brexit negotiations evolve.

The Pound fell last week following the revelation that the EU was reconsidering whether to allow the UK a two-year transition phase deal after the official Brexit deadline in 2019, in order to help negotiate a new trade relationship.

After a breakdown in talks over the nature of the UK's rights during the transition period itself, Chief EU Brexit negotiator Michel Barnier said that if the disagreements continued it was "not a given" the UK would even get a transition period at all.

This took the wind out of Sterling's sails after it rose strongly following the Bank of England's positive assessment of the economy on Thursday.

"Instead of making progress this week, Brexit negotiations have taken a step back and to the dismay of sterling bulls, this overshadowed the BoE's hawkishness," concluded Lien. 

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