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The Pound-to-Dollar Rate Gaps Lower at Start of New Week, Tough Support in 1.29s - The 5-Day Forecast

Dollar exchange rate week ahead

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- 1 GBP buying 1.2979 USD on Monday

- Tough ledge of support in 1.29-1.30 region now met

- Brexit vote main event for Sterling; CPI data for Dollar

The Pound gapped lower against the U.S. Dollar at the start of the new trading week, in line with our technical forecasts made ahead of the market open.

The 'gap' lower describes a sharp drop in the value of a financial asset in the space between when a market closes and reopens and is indicative of a sharp shift in sentiment. In this instance, weekend news that British Prime Minister is facing a large-scale defeat in parliament on Tuesday is being cited for the decline, with markets taking the view the uncertainty hanging over the currency since June 2016 is only going to be extended.

We note however that the declines mark the 8th day of decline for Sterling and are therefore consistent with a negative technical trend that has been guiding the currency ahead of this week's votes in the House of Commons.

gap lower in Sterling

Above: The 'gap' lower seen in GBP/USD on Monday is consistent with Sterling's short-term negative trend

A positive technical setup for Sterling, in place for weeks now, was undermined last week after the Pound came under heavy selling pressure, with traders cutting back on exposure to the currency ahead of what promises to be a critical week in British politics.

GBP to USD weekly

Above: The longer-term weekly chart shows the 2019 uptrend being questioned.

From a technical perspective, the pair has executed a complete U-turn after previously being in an uptrend and has fallen below some key markers, such as the 50-week moving average (MA) at 1.3129.

GBP to USD 4 hour

Above: The outlook for coming days is negative according to the short-term 4 hour chart

A bearish sign is that the pair has completed more than two lower lows and lower highs on the 4-hour chart, which suggests a new short-term bear trend may be in play.

GBP to USD daily

Support levels seen on the daily chart

The daily chart is a little more ambiguous, however, as the pair has fallen to a substantial ledge of support in the 1.29-1.30 level, composed of the 50 and 200-day moving averages (MA) and the trendline drawn from the January lows. This is likely to present a hard floor to the exchange rate and make downside more difficult.

A clear break below this support ledge, confirmed by a break below 1.2900, would be required for confirmation of more downside to the next target at 1.2800. Momentum is declining rapidly, further enhancing the bearish proposition.

In the absence of a strong downside move, however, the pair could resume going higher. The structure of the pull-back from the 1.3350 highs could simply suggest a three-wave ‘abc’ correction rather than the start of a new downtrend. This correction could turnaround and go higher in time especially given the tough band of support in the 1.29s.

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The Pound this Week: Trio of Brexit Votes to Spark Volatility

The main event for Sterling in the coming week is Parliament’s meaningful vote on Brexit on Tuesday.

With no further concessions on the Irish backstop likely from the EU, and talks being described as being close to breaking down, Theresa May is now unlikely to present the changes required to win and the most probable scenario is that Parliament then moves to vote on whether or not to exit the union without a deal, on Wednesday.

Assuming it does not vote for this outcome - parliamentary arithmetic suggests this is highly unlikely - the next most probable outcome is that Parliament votes on Thursday to decide to request a delay of Article 50 and the whole Brexit process from the EU.

That there will be a delay is currently the consensus expectation. How this will affect Sterling is open to interpretation.

“If lawmakers choose to delay Brexit, a modest rise is attainable for the Pound, while a surprise backing of May’s deal could send the Pound surging above $1.35. But In the unlikely event that a no-deal wins support, sterling could crash below $1.27,” says Raffi Boyadijian, an economist at broker XM.com.

The Brexit deal faces a heavy defeat in parliament on Tuesday because she has so far secured no major changes from the European Union, the leaders of two major eurosceptic factions in parliament said on Sunday.

Nigel Dodds, the deputy leader of the Democratic Unionist Party (DUP) which props up May’s minority government, and Steve Baker, a leading figure in the large eurosceptic faction of her Conservative party, warned “the political situation is grim”.

“An unchanged withdrawal agreement will be defeated firmly by a sizeable proportion of Conservatives and the DUP if it is again presented to the Commons,” they wrote in the Sunday Telegraph.

In further, developments a Sunday Times report says May’s team have been warned by senior Brexiteers that she would get her deal passed only if she offered to resign by June so a new prime minister could lead the second phase of negotiations.

"We think Sterling faces a more difficult road," says James Rossiter, a foreign exchange strategist with TD Securities. "A lot of good news is already in the price and that investors may have gotten a little ahead of themselves in hoping for further positive developments. With the UK's data and event calendar relatively light until the 12th, we think Sterling may start to feel the effects of gravity once again."

The other main release is UK GDP which is forecast to show a 0.2% rise in January after a -0.4% fall in December when it is released at 9.30 GMT on Tuesday.

GDP is forecast to have risen 1.2% from a year ago, up from 1.0% previously. A higher-than-expected rise would support the Pound and vice versa for a lower-than-forecast result.

The trade balance in January is released at the same time as GDP and is forecast to show a -12.2bn deficit compared to -12.1bn previously.

Also released at the same time is manufacturing production and this is forecast to show a 0.0% rise in January month-on-month compared to the -0.7% previously.

Industrial production in January is released at the same time and estimated to have fallen by an even steeper -1.4% from -0.9% previously.

The Dollar: What to Watch

Inflation data is going to be a key influence on the U.S. Dollar this week with data for February out on Tuesday at 12.30 GMT.

Headline inflation is forecast to stay unchanged at 1.6% year-on-year with core CPI also projected to hold steady at 2.2%. Higher-than-expected CPI or Core CPI could drive up the Dollar and vice versa for lower.

The producer price index (PPI) out on Wednesday at 12.30, meanwhile, is expected to stress the absence of inflationary pressures which could weaken the Dollar. PPI for final demand is forecast to fall to 1.9% from 2.0% in January. Also out on Wednesday are durable goods orders for January.

Another key release for the Dollar is retail sales on Monday. This came out sharply lower in December after U.S. Consumers tightened their belts. Retail sales are forecast to have risen by a modest 0.2% month-on-month in January, however, recovering partially from December’s 1.8% tumble. A worse-than-expected figure would only renew fears of weakening consumer spending which could weigh heavily on the Dollar.

Data for U.S. industrial output, released at 13.15 on Friday, is estimated to have grown by 0.4% month-on-month in February, while the more forward-looking Empire State manufacturing index is expected to improve from 8.8 to 10.0 in March. Other releases on Friday include the University of Michigan’s preliminary reading of consumer sentiment for March as well as the JOLTS job openings for January.

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