Pound-to-Dollar Rate's Week Ahead: Base Forming

- Tentative hints the hefty sell-off might be fading

- Employment and wage data dominates the calendar for the Pound

- Retail sales will be eyed by Dollar traders

Since mid-April the Pound-to-Dollar exchange rate has been in decline after the highs just below 1.44 were rejected amidst a slew of underwhelming UK data and indications the Bank of England would delay raising interest rates until later in the year.

However, it was the significant turnaround in the U.S. Dollar's fortunes that were the key driver with the broader Dollar complex easily being the best performer of the mid-April to early-May period.

Looking at the charts, we would find it difficult to argue against further declines in the GBP/USD exchange rate noting that momentum is clearly in the Greenback's favour.

One glimmer of hope for those eyeing a stronger British Pound is that over the past seven trading days the declines have stopped and we are witnessing the formation of a base.

This consolidation is understandable considering the GBP/USD was screaming oversold on a number of technical indicators.

The key question is whether this base turns into a springboard for a GBP/USD recovery, or is a rest before another impulse of Dollar strength?

Based on the nature of the preceding trend we would have to side with the latter and suggest more weakness is favoured. However, this might not necessarily happen in the near-term and the week ahead could well see further consolidation with gains and losses occurring in the 1.35-1.36 region.

"Prices remain in a consolidation phase, around 1.3550, that has developed over the last week or so. Such price action usually resolves to the downside, with 1.3325-1.3275 region the next main support below," says Robin Wilkin, a foreign exchange strategist with Lloyds Bank Commercial Banking.

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GBP: What to Watch

Data is back to the forefront for Pound Sterling now that markets are trading the currency on expectations for future interest rate moves at the Bank of England. Indeed, we saw Sterling come under pressure on Thursday May 10 after the Bank chose not to raise interest rates at their May policy event, despite clear signals over preceeding months that they were likely to do so. 

What we do know is that the Bank will only deliver a Sterling-supportive interest rate rise should UK data show signs of a strong recovery from a soft start to the year, and this week's data releases will therefore be key.

Tuesday May 15

Foreign exchange markets will be eyeing labour market statistics for March and April at 09:30 AM B.S.T.

The claimant count for April is forecast to have risen to 7.5K from 11.6K previously, while the unemployment rate is forecast to stay unchanged at 4.2% in March.

The three-month-on-three-month change in employment will be key, but we are yet to see market forecasts for the outcome.

Analysts at Lloyds Bank Commercial Banking are looking for a rise in employment of 150K, saying "the employment gain for the three months to March will provide a measure of the underlying strength of the economy." A rise if 150K "would be a substantive increase for the quarter, consistent with the view that the slowdown in output was most likely temporary."

For Sterling the most important release of the day is however likely to be the wage data - the average earnings index + bonus for March is forecast to have registered growth of 2.6%, down from the previous month's 2.8%.

Should wages beat expectations we would expect Sterling to rally as it suggests there is a real risk of domestically-generated inflationary pressures rising in coming months. Such an observation would likely steer the Bank of England's hand towards delivering an interest rate rise in August.

At 10:00 AM Mark Carney and some of his lieutenants will be under the spotlight when they are questioned by the Treasury Select Committee in Westminster on their current guidance for interest rates and expectations for the UK economy.

Expect some criticism from MPs on the apparent u-turn performed by the Bank of England when they opted to not raise rates in May, despite having dropped some significant hints that such an outcome was likely over preceding months.

The Bank will no doubt point at the data. What could move markets is any strong hint on future rate prospects for the economy, so keep an eye on the newswires.

"The market now assigns a greater-than-even chance that the MPC will be on hold for the rest of the year. We are not so sure, because we look for GDP growth to rebound in coming quarters. We acknowledge the downside risks that Brexit uncertainty imparts to the economic outlook, but we still forecast that the MPC will raise rates 25 bps at the August 2 policy meeting. After that rate hike, we then look for the MPC to remain on hold through the end of the year," say analyst at global investment bank Wells Fargo in their latest assessment on the future of UK interest rates.

USD: What to Watch

For the Dollar, it appears a newfound focus by markets on moves in the yields on US Treasury bonds are key.

The 10-year bond yield touching the 3% marker appears to have coincided with something of a regime shift in global financial markets; one that favoured the Dollar.

Should yields continue to move higher, the Dollar might do too. And, behind the rise in US Treasury yields and the Dollar is the continued robust performance of the US economy and expectations for yet more interest rate rises at the US Federal Reserve.

Tuesday, May 15

US retail sales numbers are out at 13:30 B.S.T. and markets will be looking for signs that the all-important American consumer is opening the wallet, something that would suggest economic expansion is likely to remain robust.

Recall, the continued strong performance of the US economy, relative to the rest of the world, is certainly one factor behind the currency's recent recovery.

Markets will be looking for a month-on-month reading of 0.3% for April. Core retail sales are meanwhile forecast to read at 0.5%.

"In the US, the data of most interest next week will be April retail sales. After disappointing in the first two months of this year, sales picked up sharply in March. We expect another solid monthly rise in April of 0.4% overall and 0.5% for underlying sales," says a preview note from analysts at Lloyds Bank Commercial Banking.

Thursday, May 17

Keep an eye on the Philadelphia Federal Reserve's Manufacturing Index for May - this is one of the most timely surveys of US economic performance and could therefore move markets if the outcome deviates from expectation.

Markets are looking for a reading of 21, down on April's 23.2.

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