The main release for the Dollar is inflation data on Friday, whilst for the Pound it is trade balance and GDP estimates on Wednesday; charts are warning that prices have just hit a major ceiling and could be knocked back temporarily.
The Pound-to-Dollar rate has reached a tough resistance zone between 1.36 and 1.37 illustrated by the orange band on the chart below.
This zone is likely to present a barrier to further upside.
It exists between two major monthly pivots, R1 and R2, which traders use to trade counter to the trend, and therefore tend to act as barriers against rising prices.
But in addition, there is also the September high situated at 1.3658, which is also likely to present a barrier to further gains.
All in all, we see upside capped by the resistance zone and there is a possibility the exchange rate could undergo a deeper correction.
A rise clear of the zone, however, confirmed by a break above the 1.3730 level would see the exchange rate move even higher towards a target at 1.3800, which is a round-number and therefore likely to see some profit-taking and a possible pullback.
The bigger picture is still on the whole bullish.
The weekly chart below shows the exchange rate rising in a steady medium-term uptrend after the establishment of the 2016 October lows.
The pair broke above a major trendline at the end of 2018, which was a bullish sign and reinforces expectations that it will continue extending higher.
The rising MACD momentum indicator further supports the bullish outlook and the fact that it is above the zero-line indicates the exchange rate is in a bull trend.
Data and Events for the Dollar
The most important data for the US Dollar does not come out until Friday when inflation and retail sales data are released.
Inflation data is out at 13.30 GMT and it is important to the Dollar because it influences interest rates which in turn are highly correlated to the Dollar.
CPI in December is forecast to show a 2.1% rise compared to 2.2% in December of the previous year, 2016.
Core CPI, which omits volatile fuel and food inflation is forecast to show a 1.7% rise, which is the same as at the same time in the previous year.
The other main release is retail sales on Friday also at 13.30, which is forecast to show a 0.4% rise compared to the previous month of November when it rose by 0.8%.
Retail sales rose by 5.8% in November compared to the same time in 2016, and although a consensus estimate is not available it is forecast to rise by 5.6% in December by data website tradingeconomics.com.
"We look for a relatively modest 0.2% rise in retail sales, with downside risks on account of the cold snap in winter temperatures and the unsustainably strong pace in core sales in the prior three months." Says Canadian investment bank TD Securities.
The week ahead will see commentary from several members of the Federal Reserve's rate-setting committee, including Fed president's Dudley, Bullard, Evans, Kashkari, and Bostic.
The Dollar may be sensitive to what they say if they touch on longer-term inflation expectations, which remain subdued in the US.
"The highlight should be NY Fed President Dudley on Thursday, who has been supportive of the Fed’s plans to date. Incoming 2018 voters Bostic, Mester, and Williams (of Atlanta, Cleveland and San Francisco) also speak at the start of the week. The FOMC is expected to tilt more hawkish in 2018, which may be confirmed by this trio’s comments." says TD.
Data and Events for the Pound
The week kicks off with the extremely timely, December British Retail Consortium (BRC) Retail Sales figures out at 00.01 GMT on Tuesday 9, with analysts keen to gauge whether the economic slowdown is worsening or not.
The big day for the Pound, however, is Wednesday, December 10, when Industrial and Manufacturing Production data for November is out, as well as the Trade Balance and an estimate of GDP.
Industrial Production is forecast to rise 0.4% from 0.0% in October, and Manufacturing production by 0.3% from 0.1% previously; although the data is important, neither of these sectors is very big anymore so only large unexpected shifts are likely to move the Pound.
The trade deficit is forecast to widen in November to -11.0bn from -10.78bn previously, and if it is even wider than expected, then the Pound will weaken as it reflects net demand for the currency from buyers of UK exports.
Finally, The National Institute of Economic and Social Research (NIESR) GDP estimate for the last three months, released at 13.00 GMT on Wednesday, is expected to come out at 0.5%.
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