The pound to dollar exchange rate saw a volatile week pass by, first moving lower after the budget delivered notable cuts to UK productivity forecasts.
Sterling then rose as a result of the Federal Reserve revising down the amount it expects to raise interest rates in 2016.
When interest rates go up it increases the value of a currency – when down it devalues a currency, so the Fed backing-tracking on raising interest rates, weighed on the dollar.
The daily chart of GBP/USD clearly shows the zig-zagging higher, and that the week ended on a new high – so overall sterling came out on top.
There is little else on the daily chart which indicates whether the currency will go higher or lower, but a break above the key 1.4668 peak of the previous down-trend would be a major game-changing moment for the currency, signalling the medium-term trend was reversing from down to up.
As such a break above that level would confirm more upside, with an initial target at 1.4950, just below the R2 monthly pivot.
On the weekly chart there is a bullish reversal sign, however, in the shape of a two-bar reversal pattern, a relatively good sign that the trend may be reversing in the medium-term - indeed limited proof of this lies in the fact that we have had two up-weeks since its formation.
The Fundamental Basis of a Continuation Higher
A weaker outlook for the dollar may be the main bullish driver for the exchange rate until Brexit referendum risks resolve themselves.
The weakness following the Federal Reserve’s decision to reduce the amount it expects to increase interact rates in 2016 has probably already been priced in to the exchange rate so there is unlikely to be any further dollar weakness from that source unless the many Fed members who are giving speeches this week move further towards not wishing to increase rates, which is unlikely so soon after they published their views following the meeting, in the form of the Federal Reserves ‘dot-plot’, a graphic which illustrates how much Fed members expect interest rates to rise in the future.
According to Broker House TD Securities it is a busy week for Fedspeak, when there are:
“Public remarks by District Presidents Lacker (non-voting), Lockhart (non-voting), Evans (alternate), Harker (alternate), Bullard and Williams (non-voting). Lockhart’s remarks on Monday will be of particular interest to the markets given his position as a centrist on the Committee. Overall, we expect the tone to reflect the Fed statement's recent dovish lean.”
The main economic data release in the coming week is Durable Goods Orders, which can move the dollar when it misses expectations by a large enough margin. Next week on Thursday March 24 Core Durables, which miss out civilian aircraft or other transportation orders which can skew the data because they are so large, is forecast to come out at 0.4% from 1.2% previously.
A further source of dollar weakness may come from central bank’s running out of ammunition with which to weaken their currencies. Central banks often use monetary policy to weaken their currency so that their exports grow and help the economy. Exports from country’s with cheap currency’s tend to be more competitive because they are more affordable.
However, currency weakening as an aim has been dropped by the European Central Bank, and the Bank of Japan have been unable to weaken the yen. From the dollar’s perspective this change of tack means the dollar may have less scope for strengthening in the future.
The dollar could also be pressured by the growing threat of Donald Trump ending up in the White House, due to concerns that his isolationist agenda might isolate the US and damage its economy. The probability of that happening, however is less than 50%.
“Handily the Economist Intelligence Unit quantified the probability of a potential Trump presidency for us. The answer it produced was “12/25”. Yes that sounds like a line from a Douglas Adams novel. In theory though a putative president Don is as dangerous as ISIS (also 12) and more so than Brexit (8) but less so that “currency volatility culminating in an emerging markets corporate debt crisis,” (16) or the Chinese economy going ka-boom (20).
Sterling’s Risk
Neither Headline UK CPI (yoy), which is forecast to come out at 0.4% in February from 0.3% previously, nor UK Public Sector Net Borrowing for February, which is expected to rise to 5.4bn from -11.8bn previously, are likely to move sterling much in the week ahead, all must be subordinated to Brexit.
Neither Headline UK CPI (yoy), which is forecast to come out at 0.4% in February from 0.3% previously, nor UK Public Sector Net Borrowing for February, which is expected to rise to 5.4bn from -11.8bn previously, are likely to move sterling much in the week ahead, all must be subordinated to Brexit.
The most recent polls, according to the telegraphs poll tracker, could not be closer.
According to Smart Currency Exchange’s Charles Purdy:
“With concerns around the “Brexit” lingering on…The downside risk for sterling certainly seems to exceed by a significant margin its upside potential.”
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