Pound-to-Dollar Rate this Week: Chart Forecast, Data and Events to Watch in Coming Week

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The Pound-to-Dollar is likely to be the focus of intense political speculation in the week ahead, however, we add an analysis of market prices to the mix, in a bid to estimate direction.

Looking at the chart of Pound-to-Dollar we note how price action has by and large been moving within a sideways range, the highs of which are situated at about 1.3250 and the floor at about 1.3025.

This period of 'consolidation' as technicians like to refer to it (green hatching) is a common feature on price charts and reflects a period of indecision when traders are biding their time, unsure of which way the market will go next.

GBP USD Nov12 day

When the period of uncertainty ends the sideways market resolves itself in a breakout either higher or lower, but more often than not, in the direction of the trend prior to the formation of the range, which in the case of GBP/USD was down (note the move down from the September peak, which preceded the consolidation).

As such we forecast a slightly greater chance of a breakout lower, which would be confirmed by a move below the October 6 lows of 1.3027.

Such a move would be forecast to move down to a target at 1.2985 initially, where the S1 monthly pivot - a technical line followed by traders - is situated and likely to present an obstacle to further downside.

A break, clearly below the pivot, however, signified by a move under 1.2955, would probably lead to a further extension down to a target at 1.2890, which is just above both the major trend line (black line) and the 200-day MA (green line), both of which are formidable barriers to further progression lower.

This is due to traders placing orders in the counter-trend direction at these levels in anticipation of a 'bounce' or even wholesale reversal, which increases the demand around them and often becomes the self-fulfilling prophecy of a bounce or stall, although a reversal requires a more significant socio-economic event.

The MACD momentum indicator in the lower pane of the chart is basing at the level of the zero-line at the moment but has the look-and-feel of a indicator about to start another move lower, indicating more downside is probable for the exchange rate as well.

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Why Technical Analysis?

Whilst many analysts focus on economic and political factors in trying to forecast currencies another method which relies solely on charts also exists, which is called technical analysis.

Technical analysis focuses on raw price data and tries to establish patterns within that data which recur over time.

The use of market cycles to forecast the next up or downturn in a market is a form of technical analysis as cycles in prices - either of stocks or shares, business activity or wheat futures - are themselves patterns which recur over time.

It is important to understand that not all patterns or cycles recur in a neat uniform way - if that were true it would render the task of forecasting child's play - rather the analysis of charts can help provide the forecaster with an edge and form an important adjunct to a mosaic array of different approaches.

Data and Events for the Dollar to Watch this Week

The main focus for Dollar traders in the week ahead will be a mixture of continual reassessment of how well Trump's tax reforms are moving towards becoming enshrined in law - if ever - and hard data.

Currently, tax reforms are at an early stage of development, with a blueprint released by the ways and means committee in the week before which is now the subject of significant revision and amendment by various republican groups in Congress and the Senate.

In the week ahead the debate about whether the reforms are likely to see the light of day could be central to the Dollar's price action.

The more likely the reforms are to be approved the higher the Dollar will go because they carry the assumption that lower taxes, especially corporate ones will spur economic growth which will make the Fed raise interest rates more quickly and currencies tend to rise with interest rates.

Why do currencies rise with interest rates? Because higher interest rates attract more inflows of foreign capital drawn by the promise of higher interest returns.

The inflows need to be exchanged into the home currency which increases demand for it, raising its value.

The main sticking points around tax reforms are that the country cannot afford them because it already has 20 trillion of debt, that the rich will get richer as a result of the reforms - losing the support of house democrats - and that the money won't, in fact, lead to greater growth as companies will spend it on share-buybacks rather than investment.

According to Mark Warner, Democrat Senator for Virgina,  the bill will have difficulty getting passed unless the Republicans go bi-partisan, which means involving Democrats in the drafting.

He notes how the only time major legislation has successfully been passed is via a bi-partisan approach, and put the failure of the repeal of Obamacare and other Trump policy initiatives down to the Republicans going it alone.

Although there may be a vote in Congress on the bill as soon as this week, it is the vote by the Senate which is important and that won't happen for a while.

Nevertheless, any news that indicates a bi-partisan approach could lead to significant upside for the Dollar.

For tax reform, the road ahead is long and hard but it should get there, says BK Asset Management Managing Director and FX market guru Kathy Lien.

"Its still a long road ahead that will be marked by both setbacks and progress but at the end of the day, we believe that tax reform will be achieved and when that happens we will see a nice near-term rally in the greenback," said Lien.

Hard Data

Hard data out in the week ahead for the Dollar includes Producer Price Inflation (PPI), of factory gate prices, out at 13.30 GMT on Tuesday, November 14.

PPI is often a good forward indicator for consumer prices because inflationary pressures are often felt in the factory before the high-street.

Higher inflation is more likely to lead the Federal Reserve to put up interest rates, leading to a stronger Dollar.

US consumer inflation (CPI), both headline and Core are out at 13.30 on Wednesday, with Core forecast to rise to 0.2% from 0.1% in October on a monthly basis, but the headline to slow to 0.1% from 0.5%.

The headline is forecast to fall to 2.0% year-on-year from 2.2% in October 2016 and remain unchanged at 1.7%. 

Retail Sales is out at the same time as CPI and is forecast to slow to 0.1% from 1.6% on a monthly basis.

Another key release, the Philidelphia fed Manufacturing Index, is out on Thursday at 13.30 and is forecast to fall 24.1 from 27.9 in November.

Data and Events for the British Pound

Political factors will remain a key focus in the coming week.

They will probably revolve around two major issues: the first is the survival of the Prime Minister and the second the passage of the 'withdrawing bill' through parliament, which is the piece of legislation which will take the UK out of the EU.

The latest reports suggest that the number of rebel Tory MP's who want Theresa May to quit the party leadership has grown to 40 which is only 8 short of the number needed to trigger a leadership challenge.

If a mutiny emerges in the week ahead, it will destabilise the political and economic outlook and likely weigh heavily on the Pound - the Pound dislikes uncertainty and questions over the UK's political direction would weigh heavily, particularly as the prospect of an anti-market Labour party Government taking power becomes more likely.

Instability in the UK Government also of course has impacts on the UK's ability to negotiate on Brexit which remains critical to the Pound's outlook.

“GBP/USD will consolidate over the coming week. In the absence of material positive economic data, GBP will not head higher because of Brexit‑related uncertainty. The EU and UK are struggling to reach a timely compromise on the divorce bill, the status of the border between Northern Ireland and EU member Ireland and the future of EU/British citizens living abroad,” says Elias Haddad, an analyst with Commonwealth Bank of Australia.

A change of leadership in the Conservative party would surely delay Brexit negotiations, while another general election would certaintly knock months of the timeline.

The other great issue is the 'withdrawal bill' which passes through Parliament this week. MP's will be debating final amendments to the bill - which provides the domestic legislation required to take the UK out of th EU - in the coming week. 

One major point of contention is whether the bill should be changed to allow MP's a vote on the final Brexit deal negotiated with the EU. A number of Conservative MPs are expected to vote with Labour to force through changes to the bill, or at the very least block passage of the bill.

If this is indeed the case then the Government's fragile majority in the Houses of Parliament will be exposed, once again drawing questions over the Government's longevity.

Hard Data

The main release in the coming week is inflation data on Tuesday, November 14, at 09.30 GMT, with October expected to see a rise of 3.1% compared to a year ago, which would represent a rise of 0.1% from the previous 3.0% result and see inflation hitting a new 2017 peak.

Such a rise in inflation would probably be marginally supportive of the Pound as it would increase the chance the Bank of

England (BOE) will raise interest rates again, perhaps even sooner than previously expected.

Nevertheless, the BOE themselves have forecast inflation peaking at 3.1% in October - but then rolling over - so it would take a sustained rise for several months to really support the Pound - or a shock rise in October of over the 3.1% expectation.

Higher interest rates strengthen currencies because they attract more inflows of foreign capital from global investors drawn by the promise of higher interest returns - and vice-versa with lower interest rates.

Central banks control the base interest rate which all other banks use to set their interest rates.

When inflation is too high central banks raise interest rates to bring prices back down by encouraging saving over spending and discouraging borrowing by making it more expensive.

Another major release for the Pound over the next five days is employment data on Wednesday at 9.30 GMT.

The main focus will not be on the Unemployment rate, however, unless it is widely divergent from estimates, but rather on wage data.

This is because earnings are directly linked to inflation with a pick up in the former leading to a rise in the later.

Therefore a strong pick-up in earnings (Ex-bonus) which were 2.2% previously and are expected to moderate down to 2.1% would help Sterling, and vice-versa for a fall.

The final major release of the Pound is Retail Sales data on Thursday at 9.30.

On a monthly basis Retail Sales both Core is expected to rise from very depressed readings in September of -0.7% and -0.8% respectively, rising to 0.1% for both.

Compared to October last year, however - ie year-on-year -  they are forecast to show a -0.4% fall for Core and -0.7% for headline compared to 1.6% and 1.2% respectively in October 2016.

The data is significant for the Pound because a further contraction in Retail Sales will increase concerns about growth and mean it is less likely the BOE will put up interest rates, resulting in weakness for Sterling.

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