British Pound to Dollar: Week Ahead Sees Bank of England and US Federal Reserve Making the Difference

Ahead of the new week’s trade we see the pound to dollar exchange rate at 1.4387, the best levels for buying dollars since mid February are now on offer.

But beware, the pound to dollar exchange rate could see some exceptional volatility in the week ahead, especially if there are any surprises from either of the two central bank rate meetings.

The Bank of England (BoE) is least likely to surprise, but it could raise some eyebrows if there is any more commentary from the MPC about Brexit.

The pound rose last week after BOE governor Mark Carney and Deputy Governor Sir Jon Cunliffe came down off the ‘wall’ and expressed mildly pro-European Union views, as well as warning against the hazards of leaving the European Union.

If there is more fervent pro-stay commentary expressed within the BoE minutes, which are released right after the decision, this could further support pound sterling as it will signal a well-respected financial establishment is backing the ‘stay’ campaign, which could well sway some of the undecideds.

According to newspaper reports betting agencies are now stacking the odds more for the referendum to support a stay vote, and if this trend towards viewing the stay campaign as the likely winner continues and gains momentum it would be just the sort of catalyst the pound needs to reverse its down-trend.

Especially because analysts are suggesting a substantial amount of the pound’s decline has been Brexit-inspired and therefore is reclaimable upon a win for the stay campaign.

The US Federal Reserve Could Surprise

A risk for the dollar is that the Fed decided to make a surprise rate hike. 
Whilst this is unlikely there is an outside possibility which traders should be cognisant of.

As suggested by a note from Commerzbank on Friday, the U.S still has broadly robust fundamentals, sporting low unemployment and robust economic growth, which they argue will almost certainly eventually translate into higher inflation:

“The Fed, on the other hand, at its meeting next week is unlikely to hike rates further – but only for now. In the US, in contrast to the euro zone, full employment has been reached, with inflation pressure gradually increasing, particularly in services.

“Hence the Fed seems set to hike rates more strongly (i.e. twice) than expected by the markets, which will lend support to the US dollar and cause yields to rise. “

For Commerzbank the real bell-weather for inflation is not any goods-based index but services prices, which are more sensitive to wage inflation since wages are a major cost for service companies, unlike manufacturers whose costs are split between goods and labour.

The core inflation rate for services has already risen from 2.4% to 3.0% since May 2015 and more inflation pressure is in the pipeline given that the unemployment rate has kept falling (and is likely to fall further).

The prices for services should therefore rise at a sharper rate in future.

As services account for 75% of the core index, rising inflation in this area carries more weight than the barely existent inflation pressure in goods prices, which is unlikely to change very much initially given the firm dollar and spare global capacity.

The core inflation rate for consumer prices already rose to 2.2% in January; the consumption expenditure deflator (PCE), which is preferred by the Fed, showed a rate of 1.7%. Consequently, the Fed’s 2% target is slowly coming within reach.

Technical GBP to USD Forecast

The Pound to US Dollar remains in a down-trend, but is showing early signs of reversal potential, nevertheless these remain inadequate to call a reversal yet.

The pair has completed a three wave a-b-c correction higher to reach a critical ‘make-or-break’ scenario with a possibility the down-trend could once again tag-team its way lower again, whilst at the same time a clean break above the c wave highs at 1.4436 would solidify the pound’s foothold higher by reversing the direction of peaks and troughs from down to up.

MACD, which measures momentum, is still in bearish territory supporting a resumption of the down-trend.

Therefore, if the pair started to move lower, a break below the March 3 lows of 1.4032 would probably confirm more downside to the 1.3835 February 29 lows.

On the weekly chart there is a two-bar reversal pattern signalling the likelihood of more upside. This gained further confirmation by the bullish finish this week.

A break above the 1.4436 highs and the R1 monthly pivot at the same level, including a confirmation gap would probably indicate a continuation of the youthful bull trend.

As such a break above the 1.4667 highs would probably confirm a move up to 1.4950 just below the R2 monthly pivot.

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