Pound-to-Dollar Rate Forecast for the Week Ahead

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A further decline for the GBP/USD exchange rate to 1.3790 is probable in the short-term.

The Pound-to-Dollar exchange rate is currently trading at 1.3970, which is roughly in the middle of the recent pair's trading range, between highs of 1.4350 and lows of 1.3765.

In the short-term, our technical studies suggest risks are tilted to the downside as the pair continues selling off, and the move down, that began at the February 16 highs, extends.

Technical studies try to make sense of an exchange rate by studying the market's structure, which is best encapsulated in price charts. Studying past action and patterns allows us to establish a forecast by assuming traders will continue to make decisions in a consistent manner.

A break below Thursday's lows at 1.3857 would probably lead to further downside to a target at 1.3790, just above where the 50-day moving average is situated at 1.3783.

At that level, however, the 50-day moving average (MA) is likely to present a major obstacle to further downside for the pair.

Major moving averages are dynamic levels of support and resistance where trending prices will often stall, bounce or sometimes completely reverse, as increased demand pushes them higher again.

This is owing to their widespread use as both institutional and private investors often employ them to make major buy and sell decisions.

A break clearly below the 50-day MA, confirmed by a move below 1.3730 would be required to confirm more downside, to the next target at 1.3660, just above the S1 monthly pivot.

Monthly pivots are used by traders to assess the strength of the trend. They also act a support and resistance levels in themselves and tend to attract short-term technical traders who trade against the main direction of the trend; they can, therefore, prove difficult to break through.

Thursday and Friday both saw the exchange rate close moderately higher than it opened (circled below) and two small updays such as this occuring in the midst of a downtrend is a sign that the next day - Monday February 26 -  will probably be a downday as the downtrend resumes. This indicator is reliably to a circa 66% probability. 

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Data and Events to Watch for the Pound

From a fundamental perspective, the most important factor for the Pound in the coming week is the outcome of the extended cabinet meeting held at the Prime Minister's residence at Chequers to heal divisions and decide on a consensus approach to Brexit.

The outcome of the meeting will be crystalised in a speech due to be delivered by Prime Minister Theresa May on Friday, the location and exact time of the speech are yet to be made clear.

The British Pound was seen as one of the better performing global currencies towards the end of the previous week with markets cheering the UK government making progress on their Brexit strategy.

The promise of Conservative party unity on the issue of Brexit is a rare commodity, but this could well be on offer following Theresa May's decision to lock her top team in a room in the English country side and let them out only once agreement had been sought. Members of Cabinet emerged from the meeting with those on either side of the Brexit divide saying talks were constructive and a unified position had been found.

"GBP is top of the pack by a small margin, as reports suggest the cabinet is closer to agreeing a unified line on the UK’s post-Brexit relationship with the EU after the Chequers meeting ended late last night," says Adam Cole, Chief Currency Strategist with RBC Capital Markets.

Brexit remains the key story for Sterling and therefore the details of May's speech, and any European response, could therefore be key.

The issue of UK interest rates will be in focus with the Bank of England's Sir John Cunliffe delivering a speech on Monday at 18.00 GMT, in which he may drop hints as to the BoE's stance on monetary policy.

There is now a heightened expectation that the BoE will raise interest rates by 0.25% in May after statements made in the February meeting statement and more recently in front of the Treasury Select Committee indicated BoE members had adopted a more 'hawkish' stance - 'hawkish' meaning members are in favour of raising interest rates at a quickened pace.

If Cunliffe's speech further reinforces a more aggressively hawkish tightening strategy from the bank and a greater chance of a May hike, the Pound will rise, since higher interest rates are supportive of Sterling, because they attract greater inflows of foreign capital drawn by the promise of higher returns.

It is not expected to, however - Cunliffe dissented from raising rates in November and may well still be on the dovish spectrum.

Clearly, if he has become more hawkish it will be a strong indication of voting intentions and push the Pound higher.

"BoE’s Jon Cunliffe is set to speak on Monday following fellow Deputy Governor Dave Ramsden’s scheduled remarks tomorrow. Given that both dissented against the November rate hike, it will be interesting to see whether they maintain their reservations in the face of the hawkish testimony delivered to the Treasury Select Committee by the Governor Mark Carney and other MPC members," said Investec analysts George Brown and Victoria Clarke.

House price data from Nationwide is out on Thursday at 7.00 GMT and is expected to rise 2.6% in February compared to a year ago and 0.2% from the previous month. Housing leads the economy they say so it is important, but there are not expected to be any surprises in the Nationwide data, so little probable impact on Sterling.

The major economic release of the week is Thursday's release of Manufacturing PMI for February at 9.30 GMT, which is forecast to show a slowdown to 55.0 from 55.3.

PMIs are surveys of key personnel (Purchasing Managers) in a sector and provide a good leading indicator of growth and activity. A result of over 50 indicates expansion and below 50 - contraction.

Construction PMI is out on Friday at the same time and is forecast to come out at 50.7 in February from 50.2 previously.

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Data and Events to Watch for the Dollar

One of the main events for the Dollar in the week ahead is the appearance of the new Governor of the Federal Reserve (Fed) Jerome Powell in front of the House of Representatives Financial Services Committee (Wednesday) and the Senate Committee on Banking, Housing, and Urban Affairs (Thursday).

Since this will be his first public appearance as the new Governor analysts are expecting Powell to comment on monetary policy.

"Given that the Governor has said very little about his plans to take policy forward, it is possible he could use these hearings as a platform to bridge rate expectations before his first FOMC meeting as its chair on March 20-21," says Investec analysts George Brown and Victoria Clarke.

After the government's decision to expand fiscal stimulus via increased spending and tax cuts most economists expect inflation to rise more rapidly than previously and the Fed to be forced to raise interest rates more aggressively, with some now even expecting four rate hikes in 2018, (from three previously).

If Powell is seen as supporting a more hawkish outlook - hawkish means in favour of higher interest rates - the Dollar will rise, as higher interest rates are positive for the currency, because they attract greater inflows of foreign capital drawn by the higher returns on offer.

Another major release in the week ahead is Personal Consumption Expenditure (PCE), which is the Fed's preferred gauge of inflation.

Core PCE in January, is out at  13.30 GMT on Thursday, March 1, and is forecast to remain at 1.5% compared to the same time a year ago and 0.3% (up from 0.2%) compared to the previous month; a higher result would support the Dollar.

Also of import for the Dollar in the week ahead is the second estimate of GDP data for the 4th quarter, which is expected to show a marginally lower 2.5% quarter-on-quarter (QoQ) rise when it is released on Wednesday, February 28, at 13.30 GMT.

A major gauge of growth and the health of the economy in the form of ISM Manufacturing PMI is out on Thursday, March 1 at 15.00 GMT.

This highly regarded survey conducted by the Institute of Supply Managers (ISM) asks questions of key managers in manufacturing and tends to be a fairly reliable indicator of future trends.

ISM Manufacturing is forecast to come out at an already fairly high 59.0 in February from 59.1 previously - it could well be market moving with the higher result than expected to lift the Dollar and vice versa for a lower result.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.