GBP/USD: 90% Chance USD Will End Month Higher Than it Started
Our research and analysis confirms the US dollar will most likely continue to appreciate through January, we give our views on where the GBP to USD conversion could move next.
Research shows that whenever Non-Farm Payrolls rises above expectations by more than 89k (which is one standard deviation from the mean), there is a 90% chance that the dollar will end the month higher.
Much as I abhor statistics as a way to forecast, this does mean there is a good chance that the dollar will continue to appreciate over the coming week, regardless of other factors.
The 292k Payrolls number ratchets up the chances that the FOMC will raise interest rates higher:
Daily FX’s David Song put it succinctly:
“Another 200K expansion in Non-Farm Payrolls (NFP) paired with a meaningful pickup in U.S. wage growth is likely to fuel a move down in EUR/USD as it puts increased pressure on the Federal Open Market Committee (FOMC) to further normalize monetary policy in 2016.”
Song goes so far as to forecast a hawkish FOMC on the 27th of January.
“Despite the cautious tone laid out in the Fed Minutes, a further improvement in labour market conditions may encourage the committee to adopt a more hawkish tone at the January 27 interest rate decision as Chair Janet Yellen remains confident in achieving the 2% inflation goal over the policy horizon.”
The question on everyone’s lips now is whether the Fed will raise in January, if they do then this could prove to be a major USD-positive event.
The probabilities must now be high that they will.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3344▲ + 0.13%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.289 - 1.2943 |
**Independent Specialist | 1.3157 - 1.321 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Data
Friday sees the release of the bulk of the important data, including the two biggy’s: Advanced Retail Sales in December (prev 0.2%, 0.2% exp), and Michigan Confidence (exp to rise to 93).
Advanced Retail Sales have been declining, so a figure below expectations may weigh on the dollar
According to TD Securities:
“Retail sales activity is expected to be negatively affected by the combination of lower gasoline prices, weak auto sales and the hit on apparel spending from the record warm weather in December.”
However, they add the proviso that these are temporary ‘distortions’, and:
“Abstracting away from these temporary distortions, control group spending is expected to be stronger, underscoring the continued buoyancy of consumer spending.”
Michigan Confidence on the other hand has remained high and could go even higher:
“The December reading nearly equalled the 2015 average of 92.9 - which was the highest since 2004.
“Importantly, all of the improvement was in how consumers evaluated current economic conditions.”
This would be a plus for the dollar.
The previous Michigan report said price discounts for durable goods were particularly bolstering sentiment:
“There have been only three surveys in more than the past half century in which a higher proportion mentioned the availability of price discounts for durables.
“Overall, the data point toward gains of 2.8% in real personal consumption expenditures during 2016.”
On the inflation front, Core Producer Prices, also out on Friday, are expected to rise by 0.1% mom in December, from 0.3% previously, whilst headline PPI (Final Demand) to drop -0.1% from 0.3% prev.
The Technical Outlook for GBP/USD, EUR/USD, AUD/USD and NZD/USD
Charts are showing broad-based dollar strength, which details aside, is expected to continue some way in the coming week.
For the pound to dollar exchange rate, the current down-trend has reached a level of major support in the form of the S1 Monthly Pivot situated at 1.4563, which, would be expected to prop up prices for a while, or maybe even lead to a short-term bounce.
The pair is slightly overstretched to the downside with ADX showing an above 50 reading.
Nevertheless, with so much positive sentiment for the dollar a break down is also possible.
The 1.4500 level as key, with a decisive break below it necessary to open the gates to more downside.
As such I would want to see a move below 1.4480 for confirmation and a target at 1.4400 where the S2 Monthly Pivot is likely to provide further support.
EUR/USD
Moving onto the euro to dollar exchange rate, we see a much less clear trend.
The pair is basically moving sideways after a false break-down from a consolidation pattern.
This is also by-the-way part of a much bigger sideways pattern clearer on bigger charts.
I’d hesitate to forecast a currency which is so balanced, however, if there is more downside, then a break below 1.0710 lows would probably see a capitulation to 1.0666.
Alternatively, a break above 1.1070 would be expected to mark a resumption of the mini-up-trend to 1.1230.
Volume is bearish but the primordial hunch part of my analyst brain is saying it could surprise to the upside – so be prepared for anything.
AUD/USD
The aussie formed a text-book triangle which it then broke down from.
Whilst it has not yet reached the target generated from the triangle breakout, it has reached a formidable level of support from the S2 monthly pivot at 0.6966 – so sorry if you were too late to join the party, because its now probably over.
That is unless intrepid spirits want to try to trade the pair lower, which would require a clear break below the obstructing pivot, signalled at the very lets by a 20 point move below it =- so below 0.6946 – which would then open the way to the home run down to the triangle target at 0.6905.
NZD/USD
With the kiwi we have had five down-days in a row, after the completion of an a-b-c in a longer-term down-trend.
The strong move down has broken below a key trend-line today which increases the chances it will continue even lower.
If it manages to break below the 0.6540 level, there is a good chance it might carry down all the way to the S2 Monthly Pivot at 0.6450.
This is just above the minimum expected target calculated at a 61.8% Fibonacci extension from the break of the trend-line, at 0.6404.
A further bearish indication that the mini-down-trend will continue is the sharp fall noted on On Balance Volume.
