The Pound-to-Dollar Rate Week Ahead Forecast: Signs of a Continued Downtrend

- GBP/USD: Three-bar bearish pattern has formed on chart.

- GBP/USD: Oversold momentum studies advocate caution.

- GBP eyes Bank of England, USD Fed and China trade talks.

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The GBP/USD exchange rate has recovered since hitting lows in the 1.26 region last week but continued fears of a 'no-deal' Brexit and general US Dollar strength are likely to weigh on the currency pair again during the week ahead.

The Pound-to-Dollar rate is in an established downtrend which appears likely to continue despite the recent two-day correction. The pair has also formed a high probability three-bar set-up that suggests a deeper decline is in the cards.

Above: Pound-to-Dollar rate chart showing Average Directional Movement index.

The three bar continuation pattern (boxed in chart above) combined with a rising Average Directional Movement (ADX) indicator is a reliable signal of a continued downtrend. 

ADX measures how strongly prices are trending regardless of the actual direction. The higher the index, the more strongly prices are trending. The optimum point for traders to join a trend is when the ADX is between 20 and 40. It was at 32.19 when the pattern completed on Tuesday.

However, due to the recovery seen over the last two trading days, we would now like to see some more confirmation before calling a continued downtrend and so are looking to see a break below the 1.2661 lows to unlock the downside target range between 1.2555 and 1.2605

This is wise given not all indicators are pointing to a continued downtrend. The RSI momentum indicator, for example, is in the oversold territory, which suggests a continued rebound may be likely. 

The RSI indicator is currently at 29 but if the market rises any further and the RSI moves above 30 - and thus back out of the oversold zone - it will be a bullish signal that could mark a reversal of the earlier trend.

Above: Pound-to-Dollar rate shown at daily intervals.

The Pound: What to Watch

The main event for the Pound in the week ahead will be testimony from Bank of England (BOE) governor Mark Carney the Parliamentary Treasury Select Committee, on Wednesday, August 22, covering the inflation and economic outlook. 

Although the BOE raised interest rates at the start of August, the chances of a further hike in the short term are generally viewed as low mainly given the increasing uncertainty around Brexit. Carney recently said the chances of a 'no-deal' Brexit were "uncomfortably high" and that this presents a risk to the economy.

The Pound is highly correlated with interest rates because of their influence over foreign capital inflows. Higher rates tend to attract greater inflows of capital, which raises demand for Sterling. Therefore, traders will be analysing Carney's statements for clues on when rates might change again, even if more clarity is unlikely.

The other major release for the Pound is the Confederation of British Industry (CBI) Industrial Trends report for August, with overall activity balance forecast to decline from 11.0 to 10.0 when the report is released on Tuesday, August 21 at 11.00 B.S.T.

CBI surveys are often closely followed by the market due to their timeliness and can provide early insight into activity within the economy. 

The Dollar: What to Watch

The main event for the Dollar in the week ahead are planned talks between the US and China regarding international trade.

If trade tensions ease as a result of the talks then the dollar could actually weaken and emerging market (EM) currencies rebound. Other talks, including those regarding the North American Free Trade Agreement as well as between the US and EU also offer scope for entente cordial and an EM bounce.

Another major event on the economic calendar for the US Dollar is the annual meeting of top central bankers and economists in Jackson Hole, Wyoming. Of particular interest to all traders will be the keynote speech delivered by Federal Reserve Chair Jerome Powell on Friday, August 24 at 15.00 B.S.T.

Powell's speech will be watched closely for signs of fresh policy signals from the world’s most powerful central bank. Markets will be particularly keen to hear anything Powell has to say about the recent emerging market sell-off and whether it could eventually have implications for US monetary policy. 

The Jackson Hole Symposium also coincides with the release of minutes from the Fed's meeting earlier in August, which are due out at 19.00 London time on Wednesday.

The Fed kept interest rates unchanged at 1.50-2.0% in August but took an upbeat tone on the outlook for the US economy, hinting that it will hike interest rates two more times this year, in September and December. Analysts and traders will be watching Jackson Hole in the hope of verifying this is still the case.

Another important economic release for the US Dollar is the durable goods orders report for July, due on Friday at 13.30 London time, which should give further insight into the strength of the American economy in the third quarter. 

Durable goods orders are expected to have declined 0.3% last month, following a gain of 0.8% in June. Consensus is for core durable goods orders to rise 0.5% after increasing 0.2% the month before.

Another major release for the US economy is new home sales data for July, which is forecast to show a 2.5% rise transactions, which would mark a partial reversal of the -5.3% fall seen in the previous month. The data is due out at 15.00 on Thursday 23, August.

Services and manufacturing PMIs are also released on Thursday, with manufacturing forecast to fall from 55.3 to 55.1 and the services index set for a decline from 56.0 to 55.9. 

Other data includes existing home sales figures for July, which are expected to show a 0.8% rise in the number of completed transactions during the recent month when the number is released at 15:00 on Wednesday.

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