Pound-to-Dollar Week Ahead Forecast: Downside Risks in a Big Week for Data
- Written by: Gary Howes
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The pound to dollar exchange rate (GBP/USD) can retreat further in the coming week, but the pullback should be shallow.
Although pound sterling's outlook has softened against the euro and other currencies, it remains relatively well supported and holds a short-term uptrend against the dollar.
GBP/USD spiked to 1.3438 last week before the inevitable pullback set in, taking the pair back to 1.3363 at the time of writing Monday.
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For now, this looks like a paring of overbought conditions (the rally meant it had diverged quite a bit from its short-term momentum indicators), and weakness should be relatively shallow as long as we're in a rebalancing moment.
GBP/USD has not yet fallen back to the key technical indicator of the 55-day exponential moving average (EMA), currently at 1.3286; while above here, the uptrend is intact.
To be sure, the pullback can extend a little further and we wouldn't be surprised to see losses extend back to 1.33 in the coming week.
However, our stance is that these pullbacks will be shallow and that the pair can recover recent losses in the coming week.
The dollar leg of the GBP/USD equation is undoubtedly in charge here, and ongoing USD softness on account of building bets for Federal Reserve rate cuts is helping GBP/USD higher.
Last week saw the Fed lower its basic rates band, while markets remain convinced further reductions are coming.
However, it will be the UK that is in focus this week: we have the Bank of England on Thursday to look forward to, where a further rate reduction in Bank Rate is likely.
This cut is expected, meaning it will be guidance on further reductions in 2026 that will have an impact on the market.
Ahead of the Bank's call, there are labour market numbers to look forward to on Tuesday, followed by Wednesday's CPI inflation data.
Above: The Bank of England and U.S. Fed are expected to 'outcut' peers, meaning GBP and USD will struggle against other currencies.
Soft figures here mean the Bank can convincingly prepare us for further reductions in Bank Rate early next year.
If so, then GBP/USD can come under further downside pressure and test that 1.33 level.
If the data beats expectations, then sterling can recover.
However, survey after survey has confirmed the UK economy came under pressure ahead of the November budget, and we think the data simply won't be able to deliver the surprises needed to generate outright GBP strength across the board.
In short, further GBP/USD upside will rest on how much further the dollar weakens into year end.
Economists look for the UK's unemployment rate to rise to 5.1% when labour market statistics are released Tuesday, confirmation of an ongoing deterioration in the jobs market.
The Bank will believe it can address this by lowering rates, which would take pressure off households and businesses.
Wednesday should see the ONS confirm inflation comes in at 3.6%, which is well ahead of the Bank's 2.0% target.
This should allow some members of the Bank of England to argue against rushing into further rate reductions.
If the data beats expectations, their hand grows stronger, prompting markets to temper expectations for further rate reductions, in turn helping the pound extend gains against the dollar.
Important Week for U.S. Data
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It's a big week for U.S. data owing to the release of labour market numbers that were delayed by the U.S. government shutdown.
The November payrolls data are released Tuesday, where expectations are for an increase in jobs of 50K and a fall in the unemployment rate to 4.4%.
Should the numbers undershoot, the market will ramp up bets for Fed rate cuts in 2026, which will weigh on U.S. yields and on the dollar.
However, should the data beat expectations, those rate cut bets will recede and the dollar can jump and potentially extend gains over the remainder of the week, dealing the likes of GBP/USD a setback.
Also keep an eye out for U.S. retail sales, also due Tuesday, which should give an indication of how demand in the economy is holding up.
Thursday brings U.S. CPI inflation data, where the expectation is for an uptick to 3.1% y/y in November, up from 3.0%.
This is clearly heading in the wrong direction for the Fed, and an above-consensus figure would question market expectations for rate reductions next year, helping the dollar in the process.
