Pound Sterling is showing bullish potential against the US Dollar, with the GBP/USD pair appearing to have shifted in its short-term trend. But potential news-flow around President Donald Trump’s tax cuts may inject volatility into the pair this week.
The Pound-to-Dollar exchange rate has altered its trend three times in the last month - and it may be about to do so again in the coming week. In this regard, signs on the four hour chart are especially compelling.
The four-hour chart shows GBP/USD recovering strongly on Friday, breaking above a trendline for the previous down move, which signals a change in the short term trend.
The sharp move up followed by the trendline break and a small sideways move, formed a pattern known by market specialists as a pennant. It looks like a triangular flag that was especially prevalent in medieval times and bears the same name.
In this case the pennant is bullish (although they can also be bearish) and it is signalling the exchange rate will probably rise to a level that is equal to the pennant's pole extrapolated higher, from the middle of the triangular consolidation. This is subject to confirmation.
The pennant gives an upside target at around 1.3280 that is also the level of the 200-day, four-hour, moving average (MA). This is where the exchange rate is likely to stall due to increased selling from technical traders anticipating a pull-back at the MA.
A break above Friday's highs at 1.3201 would provide confirmation that this anticipated upward-move is likely. Expectations of this move are supported by the MACD momentum indicator, which has crossed over its signal line.
On the daily chart, the bullish signs are more subtle.
Friday's price action - which came after markets reappraised the current state of Brexit talks - has formed a single bullish hammer candlestick pattern.
This is a bullish sign for the exchange rate - but it ideally needs confirmation, such as being followed by a further up-day.
The hammer has also formed on top of the 50-day MA, further increasing its bullish significance, as the MA is likely to provide support for the exchange rate and lessens the chance of a breakdown.
We see a faint upside bias supporting the possibility of a break higher to a target of 1.3280, confirmed by a break above the 1.3201 highs.
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Data and Events the Could move the Dollar
The Dollar got a bump last week as a result of heightened expectations that Trump may get his tax reforms through after the Senate okayed his budget, although analysts say it is a long road ahead.
Any further positive news on tax reforms will provide the Dollar with a strong backdraught in the coming week.
But on the hard-data front, the first estimates of US PMIs for October are released at 14.45 BST on Tuesday, October 24.
These are likely to be of special interest because they will provide the first estimates of economic activity post-hurricane, and thus a gauge of the "rebuilding efforts", says Bernard Aw, Principle Economist at IHS Markit.
The figures are forecast to show a rise in Manufacturing from 53.1 to 53.6 and for Services from 55.3 to 55.6.
Next major release for USD could be Durable Goods Orders out at 13.30 on Wednesday.
Durable Goods are expected to rise by 1.0% in September, compared to 1.7% in the previous month of August, and ex large transport orders by 0.5% from 0.2% previously.
Friday will see the next major release for the Dollar in the week ahead, third quarter GDP data, out at 13.30.
The market is forecasting a 2.5% rise compared to the same quarter in 2016.
This is below the 3.1% recorded in the second quarter but only because of the impact of the hurricanes.
Canadian investment bank, TD Securities, think the market is just about right and also forecast a 2.5% rise - clearly, the release will be crucial for clarifying the extent of the damage from the hurricanes.
There is an outside chance Donald Trump may announce the new head of the Federal Reserve next week, although his deadline was November 3.
Data, and Events that Could Move the the Pound
Politics will still figure highly for Sterling in the week ahead.
Whilst the EU decided at their summit last week that not enough progress had been made to move to phase 2 discussions on trade, there was a silver lining in the form of EU Council President Donald Tusk who was optimistic about a deal.
Tusk said he thought descriptions of talks as being at "deadlock" were exaggerated, that the EU would start internal preparations for phase 2 as a concession to the UK, and that he hoped the second phase would begin in December when the EU will have another summit to decide whether to go ahead with phase 2.
The Pound recovered on Tusk's more optimistic comments after having sold off almost all week, and we think there is a chance of a 'Tusk bump' on Monday as the market starts to see a light at the end of the Brexit tunnel.
Tusk’s optimistic tone regarding Brexit was mirrored by the leader of Europe’s largest economy; Germany’s Angela Merkel suggested much of the gloom and angst surrounding Brexit is a function of British media coverage.
Merkel’s view is that talks are certainly not in deadlock.
We agree that media and markets are prone to focussing on the negatives at the expense of the more optimistic elements of talks. A classic example is the fixation with EU lead negotiator Michel Barnier’s use of the word ‘deadlock’ following the fifth round of talks. Barnier did also say he believed a breakthrough was still likely before year-end.
The Pound was sold and newsprint almost focussed purely on the negative, this leaves the Pound relatively oversold and prone to upside corrections when reality dawns.
The main hard data release for the Pound will come in the form of the first release for third quarter GDP, out at 9.30 BST on Wednesday, October 25.
The consensus estimate is for GDP to grow at 0.3%, but the result could make the difference between whether the Bank of England (BOE) hikes rates or not in November.
"PMI data suggest the GDP numbers will show another lacklustre 0.3% expansion in the three months to September, matching the performance seen in the first half of the year. Even such a modest GDP expansion would be unlikely to change the views of the hawks on the Monetary Policy Committee, but a weaker number could lead to rates remaining on hold at the November meeting. A stronger number would be seen by many as sealing the deal on a hike," says Bernard Aw, Principle Economist at IHS Markit.