PoundSterlingLIVE -
- GBPUSD technicals are bearish
- Further losses possible below 1.22 pivot
- U.S. and UK inflation on tap
- In what will be a big week for macroeconomics
Following a run of five consecutive daily losses, it is hard to describe Pound Sterling's outlook against the Dollar as anything but soft.
But this is a week with significant data releases due from both the U.S. and the UK, which could yet underpin the Pound and prevent any major breakdown.
The bar to a lasting and enduring rally is nevertheless significant, and all signs point to the potential for further U.S. Dollar strength strong-arming GBPUSD lower.
Shaun Osborne, Chief Currency Strategist at Scotiabank, says short-term technicals are bearish.
"Steady losses through the course of the week have pushed Cable back to near last Friday’s low, just under 1.22. Short-term trends look soft and losses over the week suggest the soft tone may extend," says Osborne in a recent analysis.
Osborne looks for the 1.22 point to act as a short-term pivot, with any weakness below here pointing to the risk of losses extending to retest the 1.20/1.21 area.
This week is busy with earnings, inflation and retail sales data on tap for the Pound. Earnings are due at 07:00 GMT on Tuesday, with the consensus looking for a reading of 8.3% in September. Should the outcome be above this, the Pound could find some support.
The week's highlight is Wednesday's inflation report, due at 07:00, with the market preparing for a sizeable drop to 4.5% year-on-year from 6.7%.
Should the outcome be above this figure, the Pound could be supported, although we would expect any strength to be limited.
"Inflation data is unlikely to change the direction of travel for the Bank of England and we only expect a minor impact on exchange rates. We hold on to our range-trading theme with a lower limit at the psychological 1.20 resistance level," says Thomas Flury, Strategist at UBS.
Should inflation undershoot, the market would likely boost bets for rate cuts in 2024, resulting in further weakness in the Pound.
"The fall in household energy bills, coupled with base effects, is set to drive a sharp decline in headline inflation in October, though we also expect moderation in core inflation with both core goods and services easing," says Abbas Khan, an economist at Barclays (LON:BARC).
"A drop in the Ofgem Price Cap alongside slowing food and core goods momentum should result in headline CPI dropping by close to 200bps," says Sanjay Raja, Senior Economist at Deutsche Bank (ETR:DBKGn).
"More disinflation pressure is building. Our own DB Price Survey Tracker points to another 150bps fall by springtime. And our forecasts continue to show headline CPI printing closer to 3% y-o-y by April 2024," he adds.
"For now, we continue to see some downside risks to the Bank of England's CPI projections, which we think should open the door for modest rate cuts by spring time next year," says Raja.
Retail sales are anticipated to have fallen 1.0% in the year to October and 0.9% in the month.
Should the outcome be above these estimates, the Pound could rise, although gains would likely be limited. Instead, risks are tilted to the downside in the event the outcome is below estimate.
"Retail sales were surprisingly soft in September, dropping 0.9% m/m. But we think this is largely noise and expect a decent rebound in October. September's sharp falls in sales in the non-food and non-store categories look particularly odd, and we expect these sectors to have largely made up those losses in October," says Andrew Goodwin, Chief UK Economist at Oxford Economics.
Inflation also forms the highlight of the week for the U.S. Dollar, with markets looking for a 0.1% month-on-month rise in inflation in October, down on the previous month's 0.4% gain.
Core CPI is forecast to remain unchanged at 0.3%. The rule of thumb is that should inflation beat expectations, the odds of another Fed rate hike increase and rate cut bets recede.
This will underpin U.S. bond yields and the Dollar.
"We think that markets would be very attentive to any evidence that inflation remained too sticky for comfort and thus force the Fed to 'engineer' a renewed tightening of US financial conditions, in a boost to the USD," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
The market will be particularly nervous heading into the release, given the strong pushback by Fed officials last week against what they perceive as premature expectations for rate cuts.
The Dollar rose after Fed Chair Powell warned on Thursday that the Fed "are not confident" interest rates are high enough.
"The focus now turns to next week’s CPI inflation report, which will shape bets around the interest rate path," says Marios Hadjikyriacos, Senior Investment Analyst at XM.com.
"In the bigger picture, the question facing traders heading into next year is which central banks will cut rates first and how deep those cuts will be. That’s a setup that favours the dollar, as the resilience of the U.S. economy suggests the Fed might be among the last ones to launch an easing campaign," he adds.
But there are other data releases due next week which all have the ability to impact the Dollar; these include:
- Wednesday, 13:30 GMT: PPI (MoM) (Oct). Expected: 0.1%, previous: 0.5%
- Wednesday, 13:30: Retail Sales (MoM) (Oct). Expected: -0.1%, previous: 0.7%
- Thursday, 14:15: Industrial Production (MoM) (Oct). Expected: -0.4%, previous: 0.3%
- Thursday, 13:30: Philadelphia Fed Manufacturing Index (Nov). Expected: -11.0, previous: -9.0
- Friday, 13:30: Building Permits (Oct). Expected: 1.450M, previous: 1.471M
- Friday, 13:30: Housing Starts (Oct). Expected: 1.345M, previous:1.358M
"While inflation is key, the focus on activity data should not be underestimated. Industrial production, retail sales, and housing will provide fresh insights about the state of the US economy for 4Q," says Dominic Schnider, Strategist at UBS.
On balance, we think the US data prints should be mixed with room for the USD to do well. We see risks of EURUSD trading below 1.07," he adds.
An original version of this article can be viewed at Pound Sterling Live
