Pound to Dollar Week Ahead Forecast: Trend Change

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The Pound to Dollar exchange rate's technical setup has broken down, and further weakness is likely in a week dominated by the release of the U.S. PCE inflation report.

Pound Sterling fell sharply after the Bank of England signalled at its March policy update that it would soon be appropriate to cut interest rates, raising the odds of a first cut falling in June.

Meanwhile, expectations for the first Federal Reserve rate cut have been drifting in the opposite direction, with a July move now possible. This divergence is weighing on Pound-Dollar, particularly given that positioning in GBP/USD was particularly crowded heading into Thursday's Bank of England decision.

Shaun Osborne, Chief FX Analyst at Scotiabank, says the near-term technical setup for Pound-Dollar is "bearish - Price action retains a soft look".

"Daily trend support has broken (now resistance near 1.2690) and spot is testing its 200-day MA (1.2593). A retest of the low/mid-1.25 zone looks likely," he says.

"GBP/USD also now through the moving averages and trying to break below the key 1.2600 and 200dma moving average. It seemed like just last week we were trying to break above 1.2800 (it was) and now we are testing the downside. 1.2520 the big level to watch there," says W. Brad Bechtel, Global Head of FX at Jefferies LLC.

Thanim Islam, Head of FX Analysis at Equals Money, explains that the genuine prospect of a change in trend has risen.

"The Fed may well actually cut rates later than its European counterparts, which saw the biggest daily gain on USD since 2nd February," he says.

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Concerning the Pound-Dollar's technical setup, Islam says a possible change in the longer-term direction of GBP and USD could be underway, with an engulfing pattern showing on the GBP index and USD index.

"This happens when price action on a particular day engulfs the previous days price action. Add to this these patterns are occurring on rising and falling trend lines respectively, and we may well be at the start of a weakening GBP trending and strengthening USD trend," explains Islam.

Looking at this week's schedule, a speech by Catherine Mann on Monday will be interesting. She was one of those Monetary Policy Members who voted for the Bank of England to maintain rates at 5.25%, having voted for a hike in February.

The market considered her vote switch and that of Jonothan Haskel a clear signal that the Bank is closing in on a rate cut. Her justifications should shed some light on how fast and far the upcoming cycle will proceed, which could affect FX.

Looking at the U.S. schedule, we have an important inflation release due for release Friday.

Above: U.S. PCE inflation, image courtesy of UniCredit.

The Federal Reserve monitors the Personal Consumption Expenditures (PCE) index to gain insight into inflationary pressures facing U.S. consumers. The data is due Friday (note that most markets will be closed owing to the Easter holidays), and the headline rate is anticipated to be 0.4 month-on-month in February.

A beat of this figure would further expectations that the Fed needs not cut interest rates anytime soon, which would underpin the Dollar's recent rally.

"Continuing evidence that the U.S. economy is still largely resilient and the labour market remains tight as well as indications that the Fed is less unanimous on the need for aggressive easing in the face of an improving economy, could help the USD recover in the near term," says Valentin Marinov, Head of FX Research at Crédit Agricole.