Pound-to-Dollar Rate this Week: New Downside Target following Sharp Slump
Image © Nomad Soul, Adobe Stock
- GBP/USD downtrend forecast to extend in week ahead
- Break below trendline to provide confirmation
- First downside target at 50-day MA
A breakdown in Brexit negotiations between the U.K. and the E.U. has increased the chances of the UK crashing out of Europe without a trade deal and pushed the Pound 1.42% lower versus the Dollar at the end of last week.
A speech delivered by U.K. Prime Minister Theresa May on Friday, September 21, in which she said the two sides had reached a standstill in negotiations, triggered the steep decline.
Only the day before GBP/USD had risen to a peak of 1.3299 but at a crunch summit in Salzburg, on Thursday, E.U. leaders roundly rejected the British government's proposal and made it clear they were not willing to compromise.
The Pound remains the purest barometer on the prospects of Brexit talks succeeding or failing, and right now the pendulum is swinging sharply towards odds of a failure.
The exchange rate will now start the new week at 1.3073 and technical studies suggest further downside is possible.
GBP/USD has formed a bearish shooting star pattern on the weekly chart which is a bearish indicator, especially if it is followed up by another bearish week.
The daily chart shows the long down-day on Friday which brought it back down to the trendline it recently broke above from the June highs.
The strength of the move down indicates it will probably continue and we would take a break below the trendline and Friday's 1.3055 lows as providing confirmation of more downside to a target at 1.2985 and the 50-day moving average(MA).
The 50-day MA is likely to provide a tough obstacle against further declines where the exchange rate will probably stall or even reverse it thus provides an obvious downside target for the pair.
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The Dollar: What to Watch
The main release in the week ahead for the Dollar is the meeting of the U.S. Federal Reserve (Fed) on Wednesday at 19.00 B.S.T.
Everyone expects the Fed to raise interest rates by 0.25% at the meeting, with a circa 100% probability expectations according to Fed funds futures.
Given the expectation is so high an affirmative decision is now probably already priced into the Dollar so only a deviation from the expected is likely to lead to a major move in the exchange rate.
The Fed will release its economic forecasts at the same time and these too may impact on the Dollar if they are different from the previous meeting.
"The real focus will be the FOMC’s updated economic forecasts, in particular, committee members’ projections on how many times they expect to lift interest rates in 2019. In June, the FOMC’s dot plot chart pointed to three more rate rises in 2019. Any change to that forecast would likely trigger significant moves for the dollar. A downward revision is possible if FOMC members cite increased trade risks, whereas an upward revision could come if policymakers become more concerned about higher wage growth," says a report covering the coming week from brokers XM.com.
Another major release is Conference Board (CB) consumer confidence which is forecast to show a slight fall to 132.0 from 133.4, when it is released on Tuesday at 15.00. Given the vast contribution of US consumers to the US economy the metric is an important gauge of growth.
New Home Sales is forecast to rise 3k to 630k from 627k previously in August when it is released at 15.00 B.S.T. on Wednesday.
Pending Home Sales are also out in the week ahead and are expected to show a -0.1% fall when they are released at 15.00 on Thursday.
The Fed's favoured gauge of inflation, Personal Consumption Expenditure (PCE) is forecast to show a 0.1% rise in August and 2.0% rise compared to a year ago when it is released at 13.30 on Friday.
The Pound: What to Watch this Week
Currency markets are likely to continue to be affected by the shockwaves from the Brexit bombshell dropped by May at the end of last week and we will be looking for any new proposals from both the U.K. and E.U. aimed at unlocking the stalled process.
This week, further matters to consider on the political front include whether or not the Labour Party will back a second referendum on Brexit; something that is likely considering polling of Labour Party members suggests well over 80% are in favour of such an outcome. Reports suggest Labour leader Jeremy Corbyn will accept the will of his party on the matter.
Also of note is a report in the Sunday Times that Theresa May might be left with little choice but to call another general election in order to both shore up her own position and to deliver her desired Brexit plan.
Reports suggest her aides are suggesting an election might be called in November: We believe if this were to happen it will inject a significant amount of downside into Sterling which detests uncertainty.
Political developments are likely to dwarf the few economic data releases on the calendar, including industrial trends data from the Consortium of British Industry (CBI) (Monday 11.00 B.S.T), the Nationwide house price index (HPI) (Friday 7.00), business investment (Friday 9.30), current account data (ditto), Q2 GDP revisions (ditto) and gross mortgage approvals (Wednesday 9.30).
None of the above are major market moving releases unless they deviate hugely from their expected results.
Possibly of more importance for the Pound could be what Bank of England (BOE) officials say in their speeches in the week ahead about the current state of Brexit negotiations and associated risks - if they decide to comment, which they probably will.
BOE Monetary Policy Committee (MPC) member Gert Vlieghe speaks on Tuesday at 9.40, MPC member and BOE chief economist Andy Haldane at 11.45 on Thursday, and MPC member Sir Dave Ramsden speaks at 14.20 on Friday.
In addition, the week ahead also sees the release of the BOE's Financial Stability Report, at 4.30 on Monday, which will contain clues of the BOE's thinking on the outlook for the economy, although their assumptions about the outcome of Brexit may already be out-of-date following Friday's shock breakdown in negotiations.
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Lock in Sterling's current levels ahead of potential declines: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here