- GBP's 1.26% weekly gain over USD at stake in coming days.
- ABC correction on charts suggests more GBP gains up ahead.
- But raft of key economic figures to put spotlight on BoE outlook.
- Jobs, inflation, retail sales and PMI data all due in week ahead.
- USD remains resilient amid strong economy, safe-haven flows.
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The Pound-to-Dollar rate rose sharply last week and the charts are suggesting that further gains could be in the pipeline, although a raft of important economic figures will test appetite for the British currency over the coming days.
The appointment of Conservative Party MP Rishi Sunak as Chancellor has gotten investor and Sterling banking on a larger fiscal stimulus being delivered in the March 11 budget than was previously imagined, which is expected to lift growth, inflation, interest rates and the Pound in the months ahead.
Sunak's appointment made Sterling the best performing major currency last week but technical indicators are pointing to a continued climb in the Pound-to-Dollar rate over the coming days.
"This increasingly looks like a potential continuation pattern developing on the chart. Rallies will find initial resistance at the 55 day ma at 1.3063 ahead of the near term resistance line at 1.3120 and will need to regain this latter level on a closing basis to alleviate downside pressure and confirm the move higher to initially 1.3285," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank in a Friday research note.
Above: Pound-to-Dollar rate at 4-hour intervals, with 'ABC' correction and possible continuation pattern marked out.
Jones has a "neutral to positive" outlook for the Pound-to-Dollar rate in the week ahead after Thursday's rally confirmed an ABC correction pattern. Leaving aside the technical parlance, this means Sterling should now attempt a break to the upside from the larger triangle shape on the above chart.
ABC price corrections normally resolve in direction of the dominant trend that was in place before the pattern began to form. In other words, and in this instance, the move down from December's highs was simply a correction and a fresh challenge of that multi-year high could still be in the pipeline.
"It is possible that this was the end of an ‘a-b-c’ correction, but it also looks like a potential top. We are biased towards the latter scenario, in which case we should see the 55 day ma at 1.3056 ideally hold the topside," Jones told clients Thursday, before Sterling's rally.
There's still uncertainty about the technical outlook in part because Sterling was repelled by the 1.3060 level at the tail end of its Thursday rally, which doesn't preclude the patterns on the above charts from morphing into a "topping" signal, although Jones is wagering on a fresh move higher.
Jones has a positive one-to-three month outlook for the Pound-to-Dollar rate and favours it overcoming the December high at 1.3515 and then targeting 1.3867. She recommended this week that Commerzbank clients buy the exchange rate at 1.2963 and 1.2945.
Above: Pound-to-Dollar rate at daily intervals, with 'ABC' correction and possible continuation pattern marked out.
Pound Sterling: What to Watch
The Pound was last week's best performing major currency but sustaining that performance through the week ahead will be a tall order given that a raft of key economic figures are set to put the Bank of England back in the spotlight.
Pound Sterling was buoyed last week when markets saw the appointment of Conservative Party MP Rishi Sunak as Chancellor heralding greater agreement, if-not consensus between the PM's office and treasury when it comes to joint decisions over government spending plans.
The appointment has gotten investors as well as Pound Sterling banking on a larger fiscal stimulus being delivered in the March 11 budget than was previously imagined, which is expected to lift economic growth, inflation, interest rates and the Pound in the months and years ahead.
But some in the market say that Sterling and its newfound backers have gotten ahead of themselves.
"While we would expect some fiscal stimulus, it’s unlikely the government will want to use all of its ammunition with the next election so far off. In turn, markets may receive little indication to endorse such expectation next week which may fuel a correction in GBP," says Chris Turner, head of FX strategy at ING.
Pound Sterling narrowly escaped an interest rate cut in January after the BoE opted to wait and observe the performance of the economy in January and as a result, markets have reduced the assumed probability of a rate cut coming in the first half of 2020, but that assumption will be tested this week.
Tuesday at 09:30 will bring January jobs data and the Pound would be unlikely to take kindly to any perceived deterioration in the outlook for employment. Consensus is looking for the unemployment rate to remain at 3.8% but for the annualised pace of wage growth to have dipped from 3.2% to 3.1%.
"Our short term indicators continue to point to some upside pressure for unemployment, which we think could crystalise by summer," says Sanjay Raja, an economist at Deutsche Bank. "We expect inflation to track below the Bank's forecasts through Q1, raising more concerns for the MPC as we head into Spring...we expect retail sales (ex-auto) to rise by a pretty sizeable amount (1.2% m-o-m), which would mark the largest single month increase in nine."
Any increase in unemployment, or meaningful decline in wage growth, would undermine the outlook for inflation, interest rates and the Pound.
And inflation already fell sharply at year-end, from 1.7% to 1.3%, leaving it even further below the 2% target of the BoE.
Wednesday at 09:30 will see January's consumer price index released and markets are looking for the inflation rate to have returned to November's 1.7% level with the more important core inflation rate also seen retracing at least some of its earlier decline. Core inflation is seen rising from 1.4% to 1.5%.
"The flurry of data releases will further reduce expectations of an interest rate cut this year by showing that the labour market stayed healthy in December (due Tuesday), inflation rebounded in January (Wednesday), retail sales bounced back in January (Thursday) and the upturn in the activity PMIs continued," says Paul Dales, chief UK economist at Capital Economics.
Pricing in the overnight-index-swap market implied on Friday an August 06 Bank Rate of 0.59%, which is below the current 0.75% but still meaningfully above the next level down of 0.50%. In other words, there's both upside and downside risks for Sterling from any changes in market expectations for interest rates.
Those expectations will evolve in response to the jobs and inflation data but retail sales figures for the month of January and the IHS Markit flash PMI surveys of the manufacturing and services sectors for February will arguably say more about the outlook for inflation and interest rates.
"We look for total retail sales to rise by 0.3% over the month and for the ex-fuel measure to increase by 0.4%," says Philip Shaw, chief economist at Investec. "We are pencilling in a half point drop in the UK manufacturing PMI to 49.5. For the UK services PMI we look for the PMI to stand at 53.4."
Markets are looking for 0.7% gain in UK retail sales to have reversed a 0.6% decline from December when the January data is released at 09:30 Thursday.
Those figures will be important to the BoE outlook because they'll speak volumes about the New Year state of the consumer, which has been a linchpin of the economy in recent years.
Even more important are the IHS Markit PMI surveys of the manufacturing and services sectors due out at 09:30 on Friday because they'll provide a number of insights about the current state of the economy and the outlook for it.
"Should a steady or extended bounce in the PMI not be validated, the market may be inclined to return to pricing modest easing back into the OIS curve in H1-2020, leaving GBP on the defensive," warns Mazen Issa, a strategist at TD Securities.
PMI surveys will reveal the extent to which the outlook has been burnished by the UK's orderly exit from the EU into a transition period on January 31 and the 'phase one deal' between the U.S. and China, which has at least temporarily ended the trade war between the world's two largest economies.
And they'll also provide clues about the impact the coronavirus might have on two of the UK's most important business sectors over the coming months.
"A key question for the upcoming ‘flash’ February PMI is whether it will paint a picture of an economy experiencing some renewed downside influences as a result of the new coronavirus," Shaw says. "There remains significant uncertainty over how big and how persistent a blow the global economy will be dealt as a result of the coronavirus (Covid-19). We suspect that some of these concerns will start to spill over into sentiment, particularly for manufacturers."
The Dollar: What to Watch
The Dollar's performance was a chequered one last week but on a Dollar Index basis, the U.S. currency advanced by nearly half a percent amid weakness in Europe and some analysts say that trend can endure through the coming days.
Investors bid so-called risk assets higher through most of last week resulting in the Dollar ceding ground to the likes of Pound Sterling as well as all the smaller Dollars of Australia, New Zealand and Canada.
However, the antipodean currencies do not feature in the ICE Dollar Index and partly for that reason the benchmark actually gained 0.47% over the last five days, with much of the increase owing itself to losses racked up by European currencies like the Euro, Swiss Franc and Swedish Krona.
"The DXY has broken above 99.00 this week and we do not see many catalysts warranting an imminent inversion in the dollar resilience," says Chris Turner, head of FX strategy at ING. "Next week, the DXY may be lifted by a few local stories driving some key G10 peers lower."
Lingering concerns over the global economic impact of the coronavirus spreading through China, combined with a robust U.S. economic performance in the New Year is creating a fertile environment for Dollar strength, according to ING's Turner. And with the infection set to linger in the background of the collective consciousness for a while yet, the downside risks could remain quite limited for the U.S. Dollar.
"The coronavirus story appears to be mutating into some background noise that is preventing any material recovery in risk but equally still not triggering a fully-fledged flight-to-safety. This is translating into breeding ground for the dollar to retain its recent strength as the absence of a slump in rates is pairing with robust domestic data and the notion that the US should be more protected than other economies (the Eurozone, above all)," Turner says.
There is no major economic data due from the U.S. in the week ahead except for minutes of the January Federal Reserve meeting, although the central bank's current stance on monetary policy has been reaffirmed multiple times in recent weeks so the minutes may get only limited airtime on this occasion.
This should leave the Dollar taking its cues from movements in other currencies, which will themselves be driven by their own respective economic figures that are set to be published over the coming days.
"News on the Covid-19 outbreak will no doubt continue to dominate over the week ahead as investors attempt to assess whether it is being contained or not," says Shane Oliver, chief economist at AMP Capital. "The number of confirmed coronavirus cases (now named Covid-19) in China spiked over the last week, after Hubei province added patients confirmed via clinical tests (CT imaging scans) but who have tested negative via lab tests (ie nucleic acid testing). There are issues with both testing methods."
China's National Health Commission said at the weekend that as of midnight Saturday it was aware of 57,416 confirmed cases of coronavirus in the country's 31 provinces, with a further 9,419 having been discharged and 1,665 cases having been recorded as deceased. The cumulative total was 68,500.
Saturday's numbers mark a drastic increase on those from the beginning February when the infection was already gathering steam. Confirmed cases were just 14,380 at midnight on February 01 and deaths were just 304.
However, and within this time, the number of cured or otherwise discharged patients has also risen sharply, from 328 to 9,419. Many observe that the spread of the infection appears to have slowed in the last week or more given the growth rate for infections and deaths has been falling.
But China has last week changed the methodology for diagnosis to incorporate those diagnosed using "clinical diagnosis," leading to several sharp increases in the numbers of new cases disclosed on a daily basis.
The increase and methodology changes coincides with the arrival of World Health Organization staff in China for the first time.
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