The Pound to Dollar exchange rate’s bearish sideways consolidation over the last week mirrors improving US data which has once again raised interest rate expectations – especially after the healthy US June jobs report surprised markets last Friday.
The Pound, meanwhile, has lost ground after less-positive data as well as changing and unclear thinking from Bank of England officials point to an increasingly ambiguous outlook for UK monetary policy.
For GBP/USD – and the Dollar side of the pair in particular - the next major event on the calendar is US Federal Reserve Chair Janet Yellen’s testimony to congress on Wednesday at 15.00 BST.
“On tap Wednesday is key testimony on the U.S. economy and monetary policy by Janet Yellen, the head of the Federal Reserve. Remarks that express confidence in the U.S. economy and signal a central bank on track for another rate rise could buoy the buck,” says Western Union’s Joe Manimbo.
From a chart perspective, the bearish expectations linked to Yellen’s testimony which is forecast to be strongly supporting of the economic outlook and the Dollar, mean an extension of the young bearish pull-back lower.
However, given the overarching bullish tenor of the charts we would first need to see a break below 1.2810 for confirmation of more downside to a target at 1.2700.
It is also arguable that the chart retains a marginally bullish bias despite the downwards sloping consolidation.
It is possible, for example, that the rally up from the June lows to the early July peak and then the pull-back since then looks a lot like a bullish flag pattern.
A break above the 1.3032 highs would confirm a continuation of the bull trend higher, and assuming the pattern is a bull-flag , would probably reach a target at 1.3175 and the R1 monthly pivot.
Monthly pivots are levels closely followed by traders who see them as important trend-inflection and rotation points, and as such a risk to the dominant trend.
Overall analysts are more bullish the Dollar than the Pound, however, which translates into further weakness for GBP/USD rather than strength, and supports a continuation of the recent bearish behaviour.
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US Data Forecast to Improve
Analysts at Westpac say that their index of financial conditions which is a timely indicator for the Dollar index is signalling conditions are perfect for a resumption of the Dollar trend higher.
They argue that their financial conditions metric is a more timely indicator than the US surprise index which measures how much data is surprising expectations to the upside (higher) or downside (lower) and is currently giving mixed signals.
The data surprise index actually lags the conditions index by about 3-weeks, in fact, suggesting that the US is about to release some positive data releases in the weeks ahead.
“Our US financial conditions index is at its highest levels since May 2014, signalling very generous financial market conditions, a point that more than one Fedspeaker has made in recent weeks. Allowing for a three month lag that points to a sharp recovery in the momentum of the US data,” says Westpac’s Richard Franulovich, who adds that the best way to trade the lag is via the Dollar index, although GBP/USD is a strong proxy for the index.”
“What’s the best way to trade any prospective shift in the momentum of the US data?”
“Long USD positions are thus more likely to reward amid any prospective shift in US data trends in coming weeks,” he adds.
The Pound could therefore be at risk of some downside.