Pound's Uptrend Against US Dollar not Dead Yet

The Pound to Dollar exchange rate (GBP/USD) is seen consolidating after a recent strong run.

The pair rallied up from October's base near 1.2080 to November's high at 1.2674.

It is trading at 1.2497 at the time of writing confirming that impulse that lifted the pair off the floor has faded - but is it dead?

We believe there remains an upside bias to the trend but we would ideally like to see a break above the 1.2675 for confirmation.

Such a move would be likely to reach a target at 1.2800.

The 1.2304 level is a key support level for the pair, which of broken below would probably lead to a reversal down, according to Commerzbank’s analysts Karen Jones:

“We anticipate several days of consolidation above last week’s low at 1.2304.

“While it holds the November 4 high at 1.2556 could be revisited and perhaps the 55-day moving average at 1.2570 as well,” said Jones.

Momentum remains positive for GBP/USD with the pair trading above both its 20- and 50-day moving averages.

The 20 day crossed the 50 day on 23rd November - an occurance that is widely held to be a signal that momentum has turned positive on nearer-term timeframes.

However, the pair remains well below the 100 day moving average which will serve as a reminder that we are still far away from an all-out rally.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3337▲ + 0.08% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2884 - 1.2937
**Independent Specialist	1.315 - 1.3204 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Broader Dollar Rally Still Alive

The week ahead could very well see further gains for the Dollar as key data releases will help clarify how aggressively inflation could take off in the year ahead.

With higher inflation, comes higher interest rates from the Federal Reserve which also means a stronger currency.

Interestingly, strength in the Dollar often correlates with strength in the Pound against other majors such as the Euro, so in a sense a stronger Dollar could be a good thing for Sterling, even if GBP/USD fades.

The Fed is the only major central bank in town which is hawkish – ie wants to raise rates.

And whilst a hike in December is already priced in, what about further hikes in 2017? This will be key for the Dollar story going forward - if markets price in more hikes in 2017 over coming weeks the Dollar rally could take us into the new year which should in turn keep GBP/USD pressured.

"Fed Fund futures are pricing in a 100% chance of rate hike by the Fed next month and nearly 40% chance of another 25bp rate hike by May 2017. The second rate hike is not expected until the middle of next year so the dollar could extend higher if Yellen suggests that it could come sooner," says Kathy Lien, Director at BK Asset Management in new York.

A steeper trajectory on rate rises may become the fetish of the new year if markets smell inflation on the horizon, especially with Trump building up for a massive stimulus push.

For GBP/USD this may result in a continuation of the current sideways move, given the outlook for the UK is also positive, and recent data has been surprisingly strong.

Last week’s Q3 GDP revisions showed no change from the positive preliminary estimates, helping to support confidence further.

Whilst growth remains lopsidedly weighted in favour of Services and out of favour with Construction, the fact that Business Investment beat expectations was reassuring to those who had feared companies would put off investment decisions in the wake of the uncertainty created by Brexit.

One proviso is that analysts are cautioning not to read too much into the data, with both Markit and Capital Economics making the point that Q3  investment decisions may have already been taken and the real hit to investment is likely to come after Article 50 is triggered, however, overall it cannot be argued the data is weak.

Data to Watch for the Dollar

The week kicks off with Q3 GDP, on Tuesday, November 29, at 13.30 (GMT), and is expected to come out at 3.0% instead of 2.9% previously.

Conference Board Consumer Confidence in November is forecast to come out at 101.1 from 98.6 previously.

ADP Employment Change on Wednesday, November 30, at 13.15, is expected to come out at 165k from 147k previously.

ISM Manufacturing PMI is released at 09.30 on Thursday, December 1 and is expected to come out at 52.2 from 51.9 previously.

The biggest release from the market’s perspective comes on Friday the 2nd at 13.30 in the form of Non-Farm Payrolls, which are forecast to come out at 175k in November.

Data to Watch for the Pound

The main release in the week ahead is Manufacturing PMI in November on Thursday, December 1, which is forecast to rise to 54.5 from 54.3 previously.

Construction PMI, out on Friday, December 2, is forecast to fall to 52.3 from 52.6 previously.