Pound-to-Dollar Rate Week Ahead: Potential for Further Gains, PMI Data to Dominate the Calendar

Modified: Sunday, 01 July 2018 11:01 BST

- Technicals suggest the prospect of short-term gains in GBP/USD

- Watch service sector PMI out of the UK mid-week for guidance on Sterling

- Manufacturing and employment data dominate the USD's calendar this week

Pound Sterling enjoyed a strong end to June with a 1.0% jump against the US Dollar which took the market from sub-1.31 back above 1.32; the question we will be asking is whether the move is a precursor to further short-term gains?

Often a strong 'up day' encourages some follow-through and there could therefore be the prospect that the market prods the 1.33 highs which were registered in the week prior.

We see this as the first layer of resistance that is liable to challenge any strength and therefore set the 1.3315 June 22 high as the first upside target.

But, any strength will be viewed as being short-term in nature owing to the medium-term downtrend which is clearly entrenched and we will need to see further progress made by Sterling over coming days and weeks to suggest a floor is in.

Therefore, we will consider any gains in GBP/USD as being temporary in nature that will be sold into by a market still dominated by the ongoing Dollar rally which has been in place since mid-April.

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Economic Data and Events to Watch for the Pound

The Week Ahead in the UK sees the economic data calendar return to life following a seven-day period in which the few releases of note were all concentrated in the final session of the week.

IHS Markit will release the latest surveys of purchasing managers across the manufacturing, construction and services industries over the first half of the week while a speech from Bank of England governor Mark Carney caps off the week's data on Thursday.

Markets are looking for the IHS Markit Manufacturing PMI, due at 09:30 am on Monday, to slip from 54.4 in May to 54.1 for the month of June.

Consensus suggests the construction PMI will rise from 52.5 to 52.6 and that the all-important services PMI should remain steady at 54 when the data are released at 09:30 on Tuesday and Wednesday respectively.

Economists and traders will watch all of these releases closely for an early steer on the likely condition of the UK economy during the final month of the second-quarter. While imperfect as a gauge of overall economic growth, the surveys do provide insight into activity levels within three of the UK's most important economic sectors.

Currency markets care about growth because it has a direct bearing on inflation and it is changes in consumer price pressures that central banks are attempting to manipulate when they tinker with interest rates, which are themselves the raison d'être for most swings in exchange rates. Changes in rates, or hints of them being in the cards, impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

The UK economy slowed sharply in the first-quarter so policymakers and economists have been watching for signs as to whether this was a seasonal blip or the beginning of a more protracted slowdown. Thursday Bank of England governor Carney will give an as-yet unspecified speech in Newcastle, England so markets will listen closely for clues as to his latest take on the economy, as well as the outlook for UK interest rates.

Economic Data and Events to Watch for the US Dollar

The week ahead in the US promises another action-packed period for currency traders, with the latest ISM Manufacturing Index reading and the June non-farm payrolls report the main events of note.

Monday markets will watch the ISM Manufacturing Index for a steer on momentum within the US manufacturing sector. Consensus suggests the index will decline from 58.7 in May to 58.2 for the recent month, although this will still leave the benchmark of US manufacturing activity sat close to its highest level in nearly a decade.

Thursday markets will look to the ISM Non-Manufacturing Index for a measure of activity in the US services sector, for clues as to the pace of the US expansion. Consensus is for the index to slip from 58.6 in May to 58.3 in June.

Friday the market will focus on the latest US employment figures, with nonfarm payrolls forecast to have risen by 200,000 in June, down from 223,000 in May. The unemployment rate is expected to hold steady at 3.8%.

All of the data released next week will be important for the US Dollar and other international exchange rates as economists are increasingly forecasting that US economic growth could top an annualised rate of 4% for the second-quarter, which would mark a significant out performance of the rest of world economy.

Any data that confirms these bullish views will be sure to have a positive impact on the US Dollar while anything that causes markets to question those projections would deal the greenback a heavy blow given that the Dollar Index has now risen by more than 7% since the middle of April.

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