Pound-to-Dollar Rate Forecast for the Week Ahead: Hanging on a Make-or-Break Level
- GBP/USD has fallen to the level of a major trend-line and is sitting on a make-or-break level
- The Bank of England meeting is the main event for the Pound this week
- The Dollar could be impacted by the release of inflation data for April
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The Pound-to-Dollar exchange rate is trading at 1.3512 on the interbank market at the time of this article's latest update as the return of the London market following the long bank holiday weekend sees traders press the sell button on Sterling once more.
The pair is losing ground as doubts about the strength of the UK economy increase and expectations grow that the Bank of England will not raise interest rates in the near future.
From a technical perspective, we are now well below the 1.4000 psychological level and momentum looks negative, but we note the pair has reached a tough floor of support:
GBP/USD has fallen to the level of a major trendline drawn from the January 2017 lows, situated at 1.3480. At a similar level is the 200-day moving average (MA) situated at 1.3539. This provides a double-check to further declines and possibly even a platform for a rebound, although it is too early to say for sure.
The short-term trend is still down, however, and this provides an overall bearish bias, so if the pair manages to break clearly below these two levels it will continue extending, with a break below the 1.3400 level providing confirmation and raise the expectation the pair will fall to a target at 1.3200, which is calculated by taking the length of the preceding move immediately prior to the break, labelled 'X' on the chart.
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Data and Events to Watch for the Dollar
US Inflation for April is probably the most important release for the Dollar in the week ahead, when it is released at 13.30 GMT on Thursday, May 10.
Expectations are for US inflation to rise by 0.3% in April from -0.1% in March and core inflation to rise by 0.2% month-on-month.
Inflation drives interest rate expectations because central banks raise interest rates in response to rising inflation, and higher interest rates are usually supportive of a currency, so a higher inflation reading on Thursday could drive up the Dollar.
The other major release for the Dollar is Michigan Consumer Sentiment which is out on Friday at 15.00 and is forecast to show a slight pull-back to 98.4 from 98.8 previously.
Political drivers could also resurface as the trade delegation headed by Treasury Secretary Mnuchin returns from Beijing, presumably with some sort of a deal.
The week also sees a substantial slew of commentary from members of the US Federal Reserve, including, Fed chair Powell on Tuesday, May 08 at 8.15 and voting member Bostic on Wednesday at 18.15.
Data and Events to Watch for the Pound
The main event in the week ahead for the Pound is the Bank of England (BOE) interest rate meeting on Thursday, May 10 at 12.00 GMT.
Whilst previously expectations had been for the BOE to raise interest rates by 0.25% at the meeting, data showing a slowdown in growth and commentary from the governor of the BOE, Mark Carney, which brought into question the necessity of a May hike, have dampened expectations more recently.
Official market expectations now stand at roughly 20% for a hike, and Sterling has decline alongside these fading expectations. A recent survey of economists held by Bloomberg found that none of them now expect a rate hike on Thursday.
Therefore - we would expect a substantial boost was the Bank to defy expectations and raise interest rates. In theory, the Pound could retrace much of the losses witnessed over recent weeks.
The BOE's inflation report is also out at the same time, and will show the Bank's latest forecasts for the economy and can provide insight into how the Bank may formulate policy in the future.
If it expects inflation and growth to rise, for example, that could be bullish for Sterling as it will imply more rate hikes, and higher interest rates are usually positive for a currency.
We would expect guidance to be important for Sterling - what does Carney's assessment of the recent growth slowdown, is it temporary or does he believe it to be more entrenched? Will the BOE confirm further interest rate rises are indeed necessary over coming weeks? These are where we see the big story for Sterling lying.
A more upbeat assessment of the economy and the outlook could certainly turn sentiment towards Sterling for the better, while a downbeat tone could allow the recent sell-off to extend.
"We expect clear evidence of a sustained rebound in GDP growth to pave the way for next rate hike to in November 2018, followed by two more hikes in 2019," says a preview note from Berenberg.
"Our baseline case is that next week will mark a three-month postponement to rate increases, with the next 25bp hike occurring in August," says Phillip Shaw, an economist from Investec.
Data releases are second-tier in nature. On Tuesday, May 08 at 8.30 large mortgage lender Halifax releases its house price index, which is forecast to show a decline of -0.3% month-on-month in April.
Wednesday sees the release of the British Retail Consortium's (BRC) Sales Monitor, which is forecast to show a -0.7% fall in April compared to April in 2017.
Thursday, May 10 sees the release of the Royal Institute of Chartered Surveyors (RICS) House Price balance just after midnight, which is expected to show a -1.0% fall in April.
Also out on Thursday is Industrial and Manufacturing Production at 9.30 with the former expected to show a 0.1% rise mom, and the latter a -0.2% decline.
Finally, the UK trade balance is out on Thursday and is forecast to show the trade deficit widening to -11.40bn in March.
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