The Pound-to-Dollar X-Rate Week Ahead Forecast: Downtrend still Intact, though Waning

- GBP/USD trend lower still intact but lack of momentum raises question-marks

- Break below the 1.2958 lows likely to open door to 1.28s

- The main event for the Pound is the Bank of England meeting; Dollar eyes labour market data and the Fed

The Pound-to-Dollar Rate is in an established  downtrend which is likely to extend in the week ahead despite signs of declining momentum.

The pair, which began falling in April, is forecast to continue down to the next major support level at 1.2880 at the 61.8% Fibonacci retracement of the rally from the October 2016 lows.

The 61.8% retracement level has a special significance on charts as falling prices often stall and reverse at that level, and there is a risk the same may happen with GBP/USD.

61.8% derives from 0.618 which is the 'golden mean' - an ancient mathematical constant said to inform proportionality.

The next support level below 61.8 is the S2 monthly pivot at 1.2820, which can have the same stalling effect on prices and is often the location of reversals too.

A break below the 1.2958 lows would be required as confirmation before calling an extension of the bear trend.

A proviso to the bearish forecast is the lack of downwards momentum during the most recent period of activity which is a warning sign that the downtrend could be coming to an end.

Whilst the exchange rate has been making new lows during June and July the RSI momentum indicator in the bottom pane has not been similarly making new lows as would be the case if momentum was strong. This convergence between RSI and price is sometimes a bullish sign.

A break above the 1.3215 highs would probably be a sign of the start of a more bullish phase and a reversal of the short-term downtrend, suggesting higher prices on the horizon.

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Events to Watch for the US Dollar this Week

Although the Federal Reserve meeting on Wednesday at 19.00 B.S.T. is a major event for the Dollar the actual reaction may be muted as there is not expected to be a change in policy at this particular meeting.

Nevertheless, analysts will be looking to the statement for signs of what is to come, with current expectations for a September meeting hike high.

"The central bank will release its post-meeting statement as investors look for any clues on whether it will follow through with rate hikes in September and again in December," says Investing.com.

"The Fed has forecast it will raise rates two more times in 2018, having already tightened policy twice this year," adds the site.

The current probability of a hike in September is 90% and 70% in December.

"On the central-bank front, the FOMC meeting on 1 August will be probably a non-event for the USD, although being the first since President Trump criticized the Fed’s tightening strategy. Rates are expected to remain unchanged this time with no major deviation in the statement from the bank’s recent rhetoric in favor of continued gradual tightening," says Roberto Mialich, FX Strategist at UniCredit Bank in Milan.

The other big event of the week ahead is US labour market data out at 13.30 B.S.T. on Friday where markets will be watching for signs that the US economy's impressive performance will be maintained through the third quarter.

Despite record high employment in the US, Non-Farm payrolls still has the power to move markets although it is the average earnings component which is of most interest now.

A rise in average earnings would provide a sign of real growth in the US's consumer led economy and could keep interest rate expectations on the up, further boosting the Dollar.

Economists are forecasting wages to rise by 0.3% in July from 0.2% in June and to show an unchanged 2.7% rise compared to July last year.

Non-Farm Payrolls, meanwhile, is forecast to come out at 195k from 213k previously - anything around the 200k is very good considering the pool of labour is shrinking all the time.

The other highlight of the coming week for the Dollar is likely to be Personal Consumption Expenditure (PCE) on Tuesday at 12.30.

PCE is the favoured gauge of inflation for the Federal Reserve (Fed), the body tasked with setting interest rates in the US and since interest rates are a major driver of the Dollar, a higher inflation rate tends to drive up the currency.

Current market expectations are for a 0.1% rise in PCE in June compared to May and 2.0% for Core PCE, compared to June last year. Any rise above the expected might well send the Dollar higher.

Key Events to Watch For Sterling this Week

The main event for Sterling on the economic calendar in the week ahead, is the Bank of England policy meeting on Thursday at 11.00 GMT, followed by governor Carney's press conference at 11.30.

The BOE's quarterly inflation report will also be released at the same time.

The current consensus expectation is for the Bank to announce a rise of 0.25% in the base interest rate in the UK to 0.75%.

A hike will probably result in only limited upside for the Pound as the move is already widely telegraphed and lacks the 'element of surprise' for an explosive thrust higher.

The probability of a hike has been hovering at around circa 80%, supported most recently by last week's positive data releases.

Therefore, what will matter is whether the Bank hints at further interest rate rises in coming months. If the Bank strikes a hawkish tone on the matter then Sterling might well extend higher. If the market gets the sense that this is a 'dovish hike' i.e. one that is unlikely to be followed by another rate rise in coming months then the currency might fall.

"We fear that sterling, which has not benefited so far from prospects of tighter monetary policy at home, may suffer," says UniCredit's Mialich, who adds Sterling is damned if the BoE hikes, damned if it does not."

"If the BoE hikes, as we also expect, we would see this as a policy mistake hurting the economy, and thus the currency, over the medium term. If the bank leaves the rate unchanged, investors’ disappointment will likely lead to new GBP sales," says Mialich.

The one spoiler to a rate hike are Brexit risks.

EU chief negotiator Barnier's recent criticisms of key aspects of the Chequer's plan, such as goods' tracking and variable tariffing, make it possible the BOE could opt for caution and not raise rates at all.

"On data grounds a rate rise would seem justified after the weakness in Q1 proved to be temporary, however the uncertainty seen at the end of July might stay the banks hand," says Michael Hewson, analyst at CMC Markets.

Given the heightened expectations of a hike the shock of a no-change is a major risk for Sterling in the week ahead.

The other main data releases for the Pound are Purchasing Manager Survey Indices (PMIs).

The first PMI to be released is manufacturing out on Wednesday at 9.30 B.S.T, which is forecast to show a slide to 54.2 in July from 54.4 in June, although any result above 50 is indicative of growth.

Construction PMI is out on Thursday at the same time and forecast to show a fall to 52.9 from 53.1.

Services PMI is out on Friday at the same time and is expected to show a fall to 54.7 from 55.1.

PMI's are calculated using the answers from surveys of industry purchasing managers who have a pivotal view of conditions. They are seen as an important leading indicator for the economy and, therefore, impact on Sterling, to which they are positively correlated.

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