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- Established downtrend at risk of reversal
- Breakthrough in relations between China and US catalyst
- Brexit news to dominate Pound; Non-farm payrolls Dollar
In the week ahead, the risks to GBP/USD have pivoted higher in our view, based on a sea-change in trade relations between the U.S. and China. However, we must be aware that according to the charts and trends in the market the broader trend is still a negative one.
The Pound-to-Dollar rate declined almost half of a percent to close trading at 1.2752 in the previous week. Brexit uncertainty was the cause, and although the Dollar lost ground too - on diminished interest rate expectations - the Pound fell harder.
The weekly chart shows quite clearly how the pair has been in decline since the start of 2018. More recently the pair has fallen during the month of November. The longer-term trend is categorically down and normally it would normally be expected to continue south.
News out over the weekend from the G20 summit, however, suggests fundamentals may override the bearish technical bias.
The U.S. has said it is going to halt tariff hikes on $250bn of Chinese goods previously earmarked for the new year and this is likely to be profoundly negative for US Dollar (positive for GBP/USD). The Dollar has up until now traded as a safe-haven, appreciating on increased trade tensions and depreciated on improvements in relations.
Despite the overall downtrend, there are technical indications the downtrend could be about to bottom which could dovetail neatly with the new more positive fundamentals.
The decline since the start of 2018, for example, also resembles a bearish Elliot Wave in the process of completing its final 5th wave lower. If so, it would suggest the possibility of the birth of a new move higher.
The daily chart is also showing pressure on the bearish trendline drawn from the November highs.
There has already been a temporary penetration during a brief recovery last Thursday but this failed and the pair continued down. Nevertheless, there is a case for suggesting pressure building to the upside and the potential for a breakout higher.
Despite the downtrend retaining its dominance there is a tangible risk of an upside break in the week ahead and a move above the 1.2850 highs would provide confirmation for us to make a bullish call for a continuation up to a target at 1.2950, just below the 50-day moving average.
The GBP/USD exchange rate will start the week at 1.2762 on the inter-bank markets. High street banks are offering rates of between 1.2420 and 1.2505 for international payments. The dealing desks of independent FX providers are seen quoting in the region of 1.640 to 1.2670.
The Dollar: What to Watch
The main release for the U.S. Dollar in the coming week is Non-farm payrolls, which is expected to show a 200k rise in November when released on Friday at 13.30 GMT.
Any result above 200k would be considered exceptionally strong given how tight the labour market is whilst any result above 150k would be considered robust.
A positive surprise would boost the Dollar as it might suggest upside risks to inflation and higher interest rates, which are a direct bullish driver for. currencies.
Another important release for the US Dollar is ISM Manufacturing PMI, which is forecast to show a slight uptick to 57.8 in November when it is released on Monday at 16.00. Anything above 50 indicates expansion of that sector and 60 is indicative of exceptionally strong growth, thus the forecast is for continued accelerating growth which could also be bullish for USD.
ISM Non-Manufacturing PMI is out on Wednesday and forecast to show a fall to 59.7 from 60.3 previously.
The US trade balance is forecast to show a widening of the trade deficit to -$54.9bn from -$54.0bn when it is released on Thursday at 13.30. The balance has been volatile of late whipsawing from improvement to decline in 2018.
Despite President Trump's efforts to reduce the deficit using tariffs, it's unclear what the overall trend is. If the deficit continues to widen it would be a very negative sign for the US economy.
The country's budget deficit is also expanding which makes the US dependent on outside funding. History tells us this is not a particularly strong position to be in as foreign lenders tend to require higher risk premiums and are more fickle in times of crisis than domestic creditors.
This can also impact negatively on the currency in the long term since the foreign sourced debts which must be repaid are usually denominated in foreign currencies.
The Pound: What to Watch
Brexit politics will probably dominate the Pound in the coming week as Theresa May tries to woo as many MPs as possible to vote for her withdrawal deal.
As things stand, however, it looks increasingly unlikely she will be successful and there is significant uncertainty as to what will happen following the defeat with a number of potential scenarios likely to play out.
The uncertainty is likely to ensure Sterling trades recent ranges with traders unwilling to take a big directional punt on the currency until such a time as they know what the future EU-UK relationship will look like.
At the weekend Sam Gyimah, the Science and Universities minister, became the latest member of May’s government to resign after saying leaving the EU risked the UK’s interests being “repeatedly and permanently hammered,” and that the UK was at risk of losing ‘its voice its vote and its veto’.
Gyimah appeared to endorse a second referendum in his resignation note on facebook, saying, “we shouldn’t dismiss out of hand the idea of asking the people again what future they want, as we all now have a better understanding of the potential paths before us”. His voice added to the growing number now calling for a second referendum.
Prime Minister May only has a majority of 5 seats in Parliament including her DUP allies who number 10 and all of them have said they will vote against her deal because it leaves Northern Ireland vulnerable to being treated differently to the rest of the British Isles.
Further opponents include 'brexiteer' rebels and 'remainers' from with her own party. Labour and other opposition MPs will also be encouraged to vote against her by their party whips.
This leaves the most likely outcome of the December 11 vote a defeat for the government. Experts say this would be most likely followed by either a general election or a second referendum, both causing further uncertainty, and probably keeping Sterling pressured.
On the 'hard' data front, the main releases for the Pound in the coming week are the three Purchasing Manager Index (PMI) surveys for November.
The first PMI to be released is Manufacturing, on Monday, at 9.30 GMT. It is forecast to show a recovery to 51.5 from 51.1 previously.
Construction PMI is out on Tuesday at the same time and is expected to show a fall to 52.6 from 53.2 in the previous month.
Services PMI - the more important of the three - is released on Wednesday and is forecast to rise to 52.5 from 52.2 previously.
PMI’s are often used by economists as a leading indicator of economic growth as the results often signal changes taking place in the broader economy before they are revealed in hard data such as GDP.
A result of over 50 signals an expanding economy whilst below 50 contraction.
Another key event in the week ahead is a speech from Mark Carney the governor of the Bank of England (BOE) on Tuesday at 9.15. This is followed by a speech from BOE’s Vlieghe on Tuesday at 18.00, and Haldane at 18.00 on Monday. Recently the bank released a worst case scenario of how Brexit would impact on the economy.
New car sales in November are set to be released at 9.00 on Wednesday and are considered a positive barometer of wealth creation.
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