5-Day Forecast: Pound to Dollar Exchange Rate at a Crossroads Ahead of mid-Week Budget
The US Dollar starts the new week with a marginally bullish tone against the British Pound with 1 GBP buying 1.2287 USD at the time of writing.
GBP/USD lost ground last week as the Dollar rose on the increasing likelihood the Federal Reserve will raise interest rates in March thus stimulating foreign capital inflows.
Concerning the outlook. from a technical point of view I view the pair being sat at a crossroads.
It is right on a tough level of support provided by a major trendline drawn from the October lows, at 1.2212.
The big question now is whether it will rebound off this trendline or pierce right through it?
Given the previous week’s trend was down and is more likely to continue then arrest there is a marginal bias to a continuation lower.
We would want to see a clear break below the 1.2200 level, however, for confirmation of further downside, to a target at 1.2000, calculated by taking the length of the move before the trendline break (X on the chart below) and extrapolating it below the break (Y).
MACD is poking below the zero-line which is also supporting a more bearish outlook.
The pair is also now below its 50 and 200-day moving averages, a further negative sign.
Data for the Dollar in the Week Ending Mar 10
The main release for the US Dollar will be Non-Farm Payrolls at 13.30 GMT on Friday, March 10.
The consensus expectation is for 190k but investment bank TD Securities actually see this as slightly cautious, expecting a 205k result instead.
An above 200k forecast would send the Dollar higher as it would solidify March rate increase hopes from the Federal Reserve.
TD see the Unemployment rate falling from 4.8% to 4.7% in line with expectations.
The other main theme for the Dollar are rising market expectations the Fed will increase interest rates at their March 15 meeting.
Such a move would boost the Dollar by attracting my foreign capital to the US seeking higher interest returns.
UK Data to Watch Between March 06 - 10
News that the Chancellor may be increasing taxes in his Budget on Wednesday, March 8, may weigh on the Pound if the measures are seen as inhibiting growth and consumption.
Fiscal tightening would stand in contrast to the policies being implemented in the US by Donald Trump's administration who are expected to cut taxes and spend more on infrastructure.
This would impact on GBP/USD especially, with more bears moves expected on the horizon.
On Tuesday, March 7 there is the release of tier two data for the Pound in the form of the Retail Sales Monitor from the British Retail Consortium (BRC).
It is a survey rather than a hard data release but sentiment indicators are still often quite reliable indicators of future activity.
The monitor, out at 00.01 (GMT) is expected to show a 0.2% rise in February from the -0.6% decline in Jan.
Overall, recent UK data has been described as soft, and this combined with the resurfacing of fresh Brexit risks relating to calls for a Scottish referendum are have been weighing on Sterling.
Currently the market is of the opinion that the related uncertainty caused by Scotland is negative for Sterling so more losses may be on the horizon as the narrative unfolds. There is talk that the Scottish Nationalists may call for a referendum as the UK triggers Article 50.
“Sterling fell hard this week as data took a turn for the worse. After a month of very narrow trading ranges, sterling finally broke down on the heels of softer data. Aside from slower service-sector activity, manufacturing activity also eased in February and between the stronger U.S. dollar, Scotland pushing for another referendum vote and Brexit's Article 50 later this month, it was only a matter of time before the bottom underneath Sterling fell out. Now that support has been broken, we anticipate further losses in GBP,” says Managing Director of BK Asset Management, Kathy Lien in a recent note seen by Pound Sterling Live.
Budget is Key Political Event
UK politics are this week dominated by the UK budget on Wednesday when the Chancellor lays out his spending and taxation plans as the country heads for Brexit negotiations.
What could be quite Pound-poisitive would be an opening of the purse-strings and an intent to increase spending and cut taxes.
This is of course highly unlikely as Chancellor Hammond is a fiscal conservative and while some give-aways will be announced they will be modest.
The surprise would be a notable expansion in spending in anticipation of an economic slowdown relating to Brexit.
However, the economy's resillience suggests the Chancellor would rather head into the unknown with a 'war chest' of savings should activity take a dip in coming years.
