Pound-to-Dollar Week Ahead Forecast: Trade War Tensions Don't Turn the Tide

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The pound remains in a downtrend against the dollar, despite recent excitement over U.S.-China trade tensions.

The pound to dollar exchange rate (GBP/USD) was under the hammer last week amidst an impressive U.S. dollar onslaught, but was thrown a life raft on Friday with the renewal of U.S.-China trade tensions.

However, GBP/USD recovered to 1.3350 on Friday, having been as low as 1.3262 the day before, after the U.S. retaliated against a Chinese rare earths export ban with a universal 100% import tariff on Chinese goods, set to start on November 01.

The dollar's slump confirms it to be sensitive to U.S. import tariff flare-ups, and an obvious risk for the coming week is an intensification of these fears.

However, we don't expect fears to ramp up meaningfully from here, as already on Sunday both China and the U.S. gave firm indications that they are ready to negotiate this issue away.

Market relief on Monday reflects this, with futures pointing to a recovery for U.S. stock markets and the dollar is picked off its lows, pushing GBP/USD below the Friday highs at 1.3328.

That Friday recovery was not enough to shift the near-term outlook for GBP/USD and we are therefore poised for weakness over a multi-day timeframe, which would be consistent with our recent calls.

Below shows the week-ahead forecast made two weeks ago:

Keeping those annotations, here is how the market evolved by last Thursday, before the latest trade bomb was dropped:

The potential setup for the coming days and two-week period is this:

The above chart shows that GBP/USD has failed to recover above the nine-day exponential moving average (EMA), which is the blue line. While stuck below it, the week ahead forecast looks for a downtrend to extend.

The chart shows our new annotations that show we look for some sideways consolidation over the coming days, given nerves around U.S. trade policy should remain piqued.

Weakness is likely to then follow that consolidation, in sympathy with the pre-consolidation trend.

The first obvious target is Thursday's low at 1.3261 ahead of August lows at 1.3150 in the coming weeks.

GBP/USD Investment Bank Consensus Forecasts Cut

The median and mean forecasts, that provide a consensus forecast for GBP/USD, have fallen.

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Of course, what actually transpires will depend on events: the U.S. could deliver us some much-needed official economic data, something which has been lacking since the government partially shut down at the start of the month.

The U.S. Department of Labour has reportedly recalled some employees to prepare the release of the September CPI report scheduled for release October 15th.

Here, the expectation is for another 0.4% m/m increase in inflation, with the annual rate rising to 3.1% from 1.9% y/y.

Anything below here would trigger a weaker U.S. dollar as it would prompt the markets to raise bets for further Federal Reserve interest rate cuts.

In the UK, Tuesday brings with it the release of labour market figures, which will confirm an ongoing slowdown in the economy.

Expect rising unemployment to be visible in the monthly PAYE data, while wages should also show a continued slowdown.

"We also look for the ILO unemployment rate to stabilise at 4.7% in August, though risks are a little to the downside. We expect private sector regular pay to drop to 4.5%," says a weekly economics note from JP Morgan. "The still weakening labour market should gradually make the case for cuts to resume next year."

The Bank of England is finely balanced on the need to cut interest rates again in November, with all signs pointing to a split Monetary Policy Committee (MPC) that will ultimately require Governor Andrew Bailey to cast the critical vote.

Does Bailey base his vote on the labour market slowdown and proceed with a cut, or does he look at next week's inflation data that will show inflation is running at double the Bank's 2.0% target?

Just how these data land will likely influence the Governor's thinking, meaning we could get a decent FX market reaction to where the figures fall.

The rule of thumb, as always, is a below-consensus figure will weigh on the pound, while an above-consensus figure will offer it a boost.

It's also worth keeping an eye on Thursday's UK GDP release and industrial output figures. The consensus looks for a 0.2% m/m change in August, which would be consistent with an economy that is humming along at below-potential levels.

Parliament returns from the party conference recess, which means an inevitable increase in speculation about the contents of next month's budget.

Nothing good can come out of this: expect fevered speculation about which taxes will be invented and which taxes will be raised.

Inevitably, this tinkering won't raise the required sums as we start moving down the other side of the Laffer curve, meaning we will be looking at more tax rises at the same time next year.

The UK's public finances are deteriorating and this will ensure bond yields stay elevated and the pound remains at risk of a confidence crisis.

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