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Pound-to-Dollar Rate Forecast for the Week Ahead: Temporary Pullback Before Continuation Higher

 Dollar vs. Pound

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- GBP/USD is in a new short-term uptrend, but could be overbought

- Potential for a pull-back before a continuation higher

- Pound to be impacted by leadership race; Dollar by CPI data

The Pound could well extend higher this coming ewek but we are wary of a brief and temporary setback from overbought levels

The Pound-to-Dollar rate is trading at around 1.2732 at the start of the new week, after rising 0.8% in the previous week. Studies of the charts suggest that, notwithstanding a temporary pull-back, the exchange rate is set to continue rising over the next five days.

The 4-hour chart shows the pair has formed a divergence with the RSI momentum indicator. This happens when price makes a new high but it is not corroborated by the RSI. The divergence suggests there is a risk GBP/USD could pull-back, temporarily, probably to support at 1.2670.

GBP to USD 4 hour

Overall, however, it has established a new short-term uptrend, supported by the fact price has formed three sets of higher highs (HH) and higher lows (HL).

Given the old adage that “the trend is your friend” this new uptrend will probably continue higher to a target at 1.2810 and the May highs within the coming week.

We use the 4-hour chart to determine the short-term outlook, which includes the coming week.

The daily chart is bullish and shows the pair will probably rise up to a target at 1.2850 over the next 1-4 weeks.

GBp to USD daily chart

The RSI momentum indicator is actually quite bullish on the daily chart. It is relatively-speaking higher on June 7 than it was when the market was at a similar level back around May 24, and this indicates underlying bullish momentum.

The pair also appears to be forming a possible ABCD or Gartley pattern which is usually composed of three moves in a zig-zag higher in which move’s AB and CD are of a similar length. This further indicates the market will probably reach the 1.2850 target.

We use the daily chart to give us an indication of the medium-term outlook which includes the next week to a month ahead.

The weekly chart - which allows us to take an overview of the broader picture - shows the long-term trend is bearish and that over the next few months the pair will probably continue lower to the next target at 1.2380, and the 2018 lows.

GBP to USD weekly

We use the weekly chart to give us an idea of the longer-term outlook, which includes the next few months.

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The Dollar: Inflation Data

USD

The most important data releases for the U.S. Dollar in the coming week are Inflation (CPI) and retail sales.

Core CPI is expected to show a 0.2% uptick in May and a 2.1% rise compared to a year ago, when it is released at 13.30 BST on Wednesday, June 12.

Core CPI is seen as a more accurate gauge of inflation in the domestic economy than broad CPI, since it cuts out the more volatile oil and food components which can be attributed to seasonal and global factors.

A higher-than-expected result could push the Dollar higher since it could be evidencing growth - and vice versa for a lower result.

The greater risk is that lower-than-expected inflation increases pressure on the Federal Reserve (Fed) to cut interest rates.

This would be detrimental to the Dollar since lower interest rates tend to weaken currencies because they make the country less attractive as a destination for foreign investors to park their capital.

The Fed chairman recently hinted he might be more willing to consider a rate cut to support growth due to the dampening influence of slowing global growth. A lower inflation print would be seen as pushing him even more in the direction of a cut.

Retail sales is expected to show a 0.6% rise in May compared to the month before when it is released at 13.30 on Friday, June 14. Core retail sales, meanwhile, is forecast to rise by 0.4%.

Retail sales is an important indicator of consumer demand and since consumers are the biggest contributors to the U.S. economy, it's a key gauge of economic health and growth. If it rises higher-than-expected it will probably support the Dollar, and vice versa if it declines.

Industrial production is expected to show a 0.2% rise in May when it is released at the same time - it too is an important gauge of growth.

The Pound: Politics and Labour Market Data

Pound flag

Brexit politics are still likely to have the greatest impact on Sterling, with UK monthly GDP, unemployment and trade balance as the main hard data releases.

The next step in the conservative leadership contest will unfold on Monday, June 10, when candidates must declare at least eight nominations from fellow Conservative MPs in order to stay in the race. This will probably result in many of the weaker candidates being knocked out.

After that all candidates will need the votes of 17 Conservative MPs to stay in the first round ballot and at least 33 – or 10% of Tory MPs – to stay in the second round of voting.

At the moment, the leading contenders are Johnson, Gove, and Hunt, but if that changes - which is unlikely - and one of the big names gets knocked out it could impact on Sterling.

Johnson appears to be in favour of endorsing a ‘leave at all costs’ Brexit on October 31.

Michael Gove has a softer stance, aiming for a Canada-style free trade agreement and a possible further delay if necessary, which has infuriated the right of the party.

Jeremy Hunt has suggested he might be against leaving without a deal, although would so “with a heavy heart”.

The main data release is April GDP which is forecast to show a -0.1% fall compared to the previous month and a 1.7% rise compared to a year ago, when it is released at 9.30 BST on Monday, June 10. Any unexpected fall in GDP will probably weaken the Pound.

Unemployment data is expected to show the unemployment rate remain at 3.8% in April, when it is released at 9.30, on Tuesday, June 11.

Also important is average earnings which are forecast to rise by 3.1% (excluding bonus) and 3.0% (including bonus). If earnings are lower-than-expected, it will probably lead to a sell-off in Sterling.

The trade balance is expected to show a narrower -£12.96 deficit when it is released on Monday at 9.30. Generally, this is considered a positive background factor for the Pound.

Industrial and manufacturing production are expected to show a -0.7% and -1.0% decline in April when data is released on Monday, also at 9.30.

Since these are indicative of GDP growth they can also have an impact on the Pound, weakening it if they undershoot expectations and vice versa if they overshoot.

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