The Pound-to-Dollar Rate Outlook for the Week Ahead: Signs of Rebound Potential Grow

- GBP/USD starts the week at 1.3285 after rising over the preceding period

- Bullish technical signs and hopes of a Brexit deal consensus may lift GBP

- Sterling eyes GDP, trade and Industrial data; for USD eyes are on inflation data

The GBP/USD exchange rate has probably reversed and it could be beginning a new phase higher, and according to our latest technical studies a run up to 1.3350 is potentially on the cards.

Short-term studies give an indicator of what the next few days could bring and the four-hour chart below shows that GBP/USD is now probably at the start of a reversal higher.

Price action is, for example, showing two higher highs and higher lows (labeled) which is normally the minimum requirement for calling a new short-term uptrend. Since trends generally endure, we expect higher prices from here on.

The 4hr chart is not the only timeframe on which we see signs of a reversal from bear to bull, also corroborating the evidence from the lower timeframes are signs from the weekly monthly charts which are usually commensurate with the birth of a new uptrend.

On the weekly chart, for example, the pair has formed a Japanese hammer candlestick (labeled), which is usually a reversal sign, and even more so when it is followed by green bullish engulfing candle, another uptrend signifier (labeled), as is also the case on GBP/USD.

On the monthly chart, we see further evidence to support the bullish view, as the pair has returned to the 50% retracement, also known as the 'midpoint', of the previous rally (circled), and this is often a location which markets about-turn.
Pic - GBP-USD-July08-month.png

Finally, on the daily chart below, we see signs that the pair may be on the rise from the characteristics of the MACD indicator in the lower panel, which looks like it is in the middle of an up-phase which will probably continue; higher momentum usually means higher prices.

The daily chart also shows the likely next target for the pair, at 1.3350. This is calculated from the position of the 50-day moving average at 1.3365. The 50-day is likely to impose a substantial barrier to further upside.

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Market Reaction to May's Brexit Plan to set the Tone

From a fundamental perspective, things also appear to be brightening for the Pound.
Sterling may have gained after Prime Minister May gathered together her cabinet at her country retreat Chequers on Friday and hammered out a new consensus Brexit plan which they were all required to sign up to.

Her demand for a unified stance from a previously fractious cabinet could mark a turning point for the Brexit debate.

The new plan maintains a frictionless border with the EU but at the same time allows the UK to freelance its own trade deals overseas collecting tariffs on behalf of Brussels for goods arriving on English shores destined for the EU.

The plan appears to provide a compromise on most of the major previous sticking points but Brexiteer purists view it as Brexit 'in name alone' as it de facto keeps the UK in the common market whilst removing its right to a veto, and there are already rumblings of descent from euro-skeptic backbenchers.  

Yet for financial markets, it is likely to be received as a sensible proposal and therefore better for the economy. If it gains traction and becomes a realistic solution the Pound should bounce back in the week ahead. The main determinant of whether the deal has longevity is the reaction of EU partners in Brussels, especially on the sticking point of freedom of movement.

Overall, there thus appears a bias of for a rebound higher in the week ahead.

Data and Events for the Dollar in the Week Ahead

The Dollar is playing a defensive game at the start of the new trading week.

The currency lost some ground towards the end of the previous week on trade-war concerns after the US and China traded tit-for-tat tariffs of 34bn each on lists of imports from the other.

Despite a rise in equity indices at the same time suggesting a market still willing to stomach risk many of the Dollar's emerging market FX adversaries weakened on global growth fears.

Yet still, the greenback lost ground overall as it fell to its more heavily weighted developed market adversaries, the Euro and the Pound.

A further downer for the Dollar was mixed labour data on Friday which although showing a higher than forecast (213k) number of people acquiring jobs in June showed a lower-than-expected rise in wages, of only 0.2%, which was disappointing. Wages are now the most significant indicator for the currency since they impact more directly on inflation and interest rates; higher interest rates generally drive up currencies as they boost inflows of foreign capital seeking somewhere lucrative to park.

Which brings us on the primary drivers for the currency in the week ahead, inflation data and its potential impact on the decision-making of the body in charge of setting interest rates in the US, the Federal Reserve (Fed).

The latest brace of CPI numbers are expected on Thursday, July 12 at 12.30 GMT, and as headline inflation rises up ever closer to 3.0% investors will be asking when the Fed next decides to raise interest rates in a bid to cool it down.

"Although the consumer price index is not the Fed’s preferred inflation gauge, the fact that it is headed for the 3% mark nevertheless signifies that inflationary pressures, whilst modest, are present in the US economy, laying the risks firmly to the upside." Rafi Bouyadjuidan, an analyst at XM.

The minutes from the Fed's most recent interest rate meeting out at the end of last week suggested it continues to expect to raise interest rates at the same rate as previously but if inflation accelerates it could increase their sense of urgency and push up the Dollar in the process.

"The overnight FOMC Minutes release came out largely in line with expectations.  The Federal Reserve once again outlined their consistent bias towards higher US interest rates. This should be supportive towards the Dollar over the medium and longer-term, as a result of investors being reminded of the ever-stretching divergence in economic and monetary policy between the United States and its developed counterparts," says Jameel Ahmed, global head of currency strategy and Market Research at FXTM.

CPI is not the only inflation gauge out in the week ahead, factory gate prices, or PPI, are out as well, scheduled for release at 12.30 on Wednesday, July 11.

Data and Events to Watch in the Week Ahead for Sterling

The reaction of the EU to Theresa's new Brexit proposal, especially that of the EU's chief negotiator Michel Barnier, will be a key issue in the week ahead for Sterling, probably the most significant event, assuming a reaction is forthcoming.

"While GBPUSD advanced on news that UK Prime Minister Theresa May won support for her 'soft Brexit' approach to the customs union internally, the real test is whether the EU is warm to their position," says John Kicklighter chief strategist at DailyFX.com.

Beyond that, however, it is a relatively quiet week for the Pound, with the most significant data industrial and manufacturing production, and trade data for May released on Tuesday, July 10 at 8.30 GMT.

Last week the pound was supported by strong Services PMI data for June which helped dispel fears of the Q1 slowdown extending into Q2 - the big question now is whether heavy industry experienced the same recovery and if it did it will probably support Sterling.

"A strong set of figures would almost certainly give the pound another leg up," says Rafi Bouyadjuidan, an analyst at XM in his week ahead commentary.

Yet not all analysts share his view:

"The manufacturing output is unlikely to alter the view of Sterling trapped in corrective mode against the US Dollar in the week ahead," counters Mario Blascak, an analyst at FXStreet.

The other main release for the Pound is the new monthly GDP estimate (for May) out at the same time as the other data on Tuesday. 

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