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British Pound Predicted to Test 1.4065 Against US Dollar as Services PMI Numbers Betray a Sluggish UK Economy

pound to dollar exchange rate week ahead forecast

We bring together a number of forecasts on the pound to dollar exchange rate which should give readers a sense of the key numbers to be aware of over coming days and weeks.

The week's big economic data event for sterling is the release of UK services PMI from Markit and the CIPS.

The figure of 53.7 that was released meets analyst expectations exactly, thus there is a neutral impact for sterling.

Total activity increased at a slightly faster rate than in February, but on a quarterly basis growth over the first three months of 2016 was the weakest since Q1 2013.

“Though the index was still in positive territory, the impact of increased competition, uncertainty over Brexit and new buy-to-let and stamp duty rules possibly cooling the housing market showed that there was less appetite for a more robust response in activity," says David Noble, Group Chief Executive Officer at the CIPS.

The longer-term outlook for service sector activity remained relatively subdued in March, with optimism remaining among the weakest registered over the past three years.

The pound remains 0.3% lower against the dollar on a day-by-day comparison at 1.4213 following the release.

"From a technical perspective the short-term outlook remains bearish, having rejected the 1.45 range resistance region and subsequently held 1.4290 intra-day resistance yesterday," says Robin Wilkin at Lloyds Bank on GBP/USD's near-term prospects.

While under this level the bias is for a move back to re-test 1.4065 range support is the base-case scenario held by Lloyds.

"Medium-term we expect the market to trade a range between 1.3850-1.35 support and 1.45-1.48 resistance. Long-term the trend remains down, with the greater risk still for a test below 1.35 key support, which has held since 1985," says Wilkins.

1.28 is seen as key support below and a move back through 1.48/1.50 is needed to alleviate this underlying bear bias it is argued.

Latest Pound / US Dollar Exchange Rates

United-Kingdom United-States
Live:

1.2946▲ + 0.33%

12 Month Best:

1.5016

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1.2506 - 1.2558

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Any strength in the pound should be seen as corrective only argues Lucy Lillicrap, a risk manager at Associated Foreign Exchange in London, "although sterling prices are evidently trading above 1.4000 at present this key/historic level nonetheless looks vulnerable to attack again going forward." 

Meanwhile, Lillicrap suggests fresh rebounds face resistance around 1.4325 then 1.4500 initially and unless an extension back through 1.4650 can be engineered as well an eventual re-test of prior notable 1.3825 area lows is anticipated.

NB: should this give way 1.3400 and 1.3000 would be targeted next says Lillicrap whereas 1.5000 appears out of reach for the moment.

It remains our base case at Pound Sterling Live that more downside will emerge until such a point as a new up-trend or other strong sign occurs to change that conclusion.

Therefore, a break below the minor trend-line at roughly 1.4130-40, confirmed by a move below 1.4100 would be expected to spark a continuation down to a target at 1.4003.  

A clear break below the S1 monthly pivot at 1.4003 would be required to confirm further downside, as monthly pivots pose an obstacle to down-trend as they are a point where traders tend to cluster buy orders en masse in expectation of a bounce or reversal.

As such a clear break below the S1 would be required to forecast more downside to the next target at the 1.3835, February 29, 7-year lows. Such a break would need to clear below 1.3950 to gain confirmation.

GBP to USD week ahead

GBP/USD pair is showing early signs of a major bullish reversal – 1.5000 in sight.

The outlook, however, is complicated by the fact that the GBP/USD’s daily chart is showing signs of a broader reversal potentially developing.

Whilst it is too early to be certain it is worth noting, in case the exchange rate starts pushing higher within the range again.

The chart featured above, shows the reversal pattern, known as an ‘inverted head and shoulders’ forming at the lows.

It has been highlighted in red and labelled, and is composed of a trough (the first shoulders or ‘s’) a small rally before another lower trough labelled ‘H’) and then another rally, followed by a final trough, labelled ‘s’ again, composing the right shoulder.

The buying volume spikes circled in the lower pane provide supporting evidence for the validity of the pattern.

A break above the neckline at the February 4 highs of 1.4668 would provide confirmation of a breakout higher, with an initial target at the 61.8% extrapolation of the height of the pattern at 1.5000.

The progressively stronger MACD -  a momentum indicator - in the higher of the two indicator panes, backs up the possibility the trend could reverse and move higher.

However, despite all these early signs, until the neckline at 1.4668 is breached the pair is still technically in a longer-term own-trend with expectations of a break below 1.4100 leading to further downside as outline above.

Indeed, a break below the minor trend-line at 1.4130-40, confirmed by the move below 1.4100, would invalidate the inverted head and shoulder pattern, removing the bullish threat.

Data Hot-Spots in the Week Ahead

The week will be dominated to certain degree by the release of the Fed’s March 15-16 meeting minutes on Wednesday April 6.

Analysts will concentrate on whether there is a more optimistic bias to the minutes than was reflected in Janet Yellen’s recent more cautious comments at the Economic Club of New York.

If the minutes show signs the Fed is closer to raising interest rates this will further boost the dollar after Friday’s strong NFP result.

“We expect the minutes to sound somewhat more hawkish than Yellen's recent remarks, potentially catching the rates market off guard, if for no other reason than more hawkish views will be represented.” Say the FX team and BofA.

Other data highlights include the ISM Non-Manufacturing Composite on Wednesday April 6, which is forecast to rose to 54.0 from 53.4 in March.

Further commentary from Chairman of the Fed Janet Yellen on Thursday -  as well as former Fed Chairs’s Alan Greenspan, Bernanke and Volcker may also cause volatility if a cautious stance appears to be the consensus.

NFP’s Stay Above 200k

Whilst the Non-Farm Payrolls result was only 10k above the 205k forecast by most analysts, it was nevertheless a beat, and above the key 200k level. The previous month was also substantially revised up.

Several notable analysts had speculated the result might disappoint substantially due to recent sharp divergence with underperforming ADP employment change, since the two tend to track each over time so divergences are normally righted.

However, this was not the case in the end, after NFP’s for March showed 215k new vacancies were filled.  

The continued strong labour market data increases the chances the Federal Reserve will not go back on their promise to raise interest rates again this year.

Recent comments from Chairman of the Federal Reserve, Janet Yellen, revealed a new caution in raising rates, which pushed the dollar lower, however, she did say that the decision would mainly be based on how good data was.

The better-than-expected NFPs will be viewed as good by Yellen and her fellow Fed policy board members, increasing the possibility they may raise rates sooner – possibly in June -  than many pundits have suggested.

 

 

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