GBP/USD Weekly Forecast: Brexit hell bells overshadow the macro picture

  • The GBP/USD remained flat during the second week of November riding the wave of Brexit optimism in the first part of the week just to fall in the second.
  • The macro data in services deteriorates while the UK GDP rose less than expected in the third quarter.
  • The trinity of the most important macroeconomic indicators is due next week, but it is the Brexit headlines to decide upon the Sterlings directional move. 
  • FXStreet’ s Forecast Poll turned bearish along the forecast time frame with Sterling seen ending below 1.3000 in 3-months time. 

With Brexit headlines having so much influence on the currency market and finishing the UK Brexit deal in the next seven days would be “pushing” according to British Foreign Secretary Jeremy Hunt, the FX market is destined to surf the Brexit headlines induced volatility rather than reflect the economic reality of macro data. 

Sign of a Brexit deal completion is expected to support Sterling while Brexit deal negative news weighs on its value. Although a great set of the UK data is scheduled for the next week with inflation and wages in the UK rising, with Brexit deal nowhere at sight Sterling is likely  to remain heavy.

It was the UK Brexit Secretary Dominic Raab who indicated last week that the Brexit deal will be done by November 21, but regardless of Brexit optimism reflecting in spot rate of Sterling, the European Union officials remain skeptical. The Foreign Secretary Hunt still thinks the deal can be done within the next three week, as closing the deal in next seven days would mean too much “pushing.” 

In terms of the market movement, the GBP/USD managed to creep higher during the second week of November after opening with the upside gap at 1,3040 compared to 1,2968 on Friday, November 2. The Brexit optimism was driving the Sterling up to 1,3175 high after the US Mid-term elections saw Democrats taking the control over the House while Republicans retained the Senate majority. The division of the power was weighing on the US Dollar across the board.

The Brexit headlines overweighed the macroeconomic fundamentals over the last week as the deterioration of the UK services PMI was ignored by the FX market.

The UK services UK service eased to 52,2 in October, its weakest since the snowrelated soft patch in March this year. The new work component was the weakest since July 2016as higher fuel bills and salary payments contributed to the fastest rise in average cost burdens since June. 

The UK services PMI


Apart from the US Mid-term elections, the US Federal Reserve’ s meeting was at the top of the agenda for markets. The Fed decided to keep the rates unchanged in line with market expectations providing a clear guidance for markets to expect the December rate hike. The Fed’s message was widely expected with market pricing in the 75% probability of a December rate hike hours before the Fed decision anyway. 

The UK third-quarter GDP came out in line with the market expectations as the quarterly rise of 0.6% and the annual increase of 1.5% were both projected by the market. The UK GDP is growing at the fastest pace since late 2016, but the news had little effect on the currency markets hammered by Brexit uncertainty. 

The structure of the UK third-quarter GDP the main driver of UK GDP in the services sector that contributed by 0.33% to the UK third-quarter growth rate followed by construction contributing by 0.13% and the production contributing by 0.11% the third-quarter growth. Within this structure, the manufacturing contributed negatively to the third-quarter growth as it fell -0.2% over the quarter.

The UK GDP growth


Technical analysis

GBP/USD daily

The GBP/USD is moving in a corrective mode on a daily chart with the correction extending from the cyclical low of 1.2698 reached on October 31 to a correction high of 1.3175 reached last week. After breaking the 1.2900 resistance representing 38.2% Fibonacci retracement of post-Brexit correction from 1.1970 to 1.4377, the currency pair moved higher to test a 50% retracement of the same move at 1.3195. Moreover, the 50-day and a 100-day moving average clustered at 1.3034 with the crossover representing a strong bullish signal known as a golden cross. The technical oscillators are pointing upwards with Slow Stochastics moving to the overbought territory and making a bearish crossover there. The indicators on a daily chart need to confirm the golden cross and the momentum needs to pick up to break a 50% Fibonacci level and move higher towards 1.3260-1.3300. On the other hand, with the spot moving lower, the Slow Stochastics indicates a bearish crossover with prices declining in a short-term horizon first to 1.2960 before 1.29000 is tested.

GBP/USD 1-hour chart

The GBP/USD broke the 26.3% Fibonacci retracement level of 1.3085 to the downside as hawkish Fed and Brexit pessimism pushed the currency pair past key support level. The Relative Strength Index and Slow Stochastics made a bearish turn moving into the oversold territory. The key area of support at 1.3085 was broken and the currency pair is now in the run to close the Monday morning gap at 1.2960 next.

The week ahead in economic data

The trinity of the most relevant economic indicators is due in the UK next week. The UK labor market report is expected to see wages rising 3.1% excluding bonuses and the unemployment rate stuck to four decades low of 4%. Wages including bonuses though are expected to accelerate to 3.0% y/y in three months to September. The rise of the wages and the labor market tightness are the main reasons for the Bank of England to expect the inflation to decelerate towards the 2% inflation target only in a three-year horizon. 

The UK inflation data are due on Wednesday next week with the UK headline inflation expected to accelerate to 2.6% while core inflation is seen at 1.9%.

The UK retail sales report is due on Thursday next week with retail sales being the source of the economic tensions as the online sales outpace the traditional and about 200 shopping centers across the UK are in danger of falling into administration. The closure of the shopping centers, especially in small towns will have negative consequences both on retail sales and retailer’s financial performance.

UK economic calendar for November 12-16

 

On the other side of the Atlantic, the US economic calendar is scheduled to deliver the inflation and the retail sales data in the week ahead.

The US headline inflation is expected to accelerate to 2.4% over the year in October while core inflation is expected to remain unchanged at 2.2% y/y, the US Labor Department data are scheduled to show next Wednesday.

On Thursday next week, the US retail sales are seen increasing 0.4% over the month in October while the core retail sales stripping the basket off auto sales are expected to rise 0.5% m/m after falling -0.1% m/m in the previous month. 

US economic calendar for November 12-16

FXStreet Forecast Poll

The FXStreet Forecast Poll estimated the FX spot rate for GBP/USD to reach 1.2938 compared with 1.3040 spot rate at the late afternoon in Barcelona. For the third week of November, the FXStreet Forecast Poll see the spot to reach 1.3022 with 38% of bullish forecast, down from 43% bullish forecast last week. Bearish forecasts for a week ahead reach 56% up from 50% last week and sideways forecast remain unchanged at 6%.

Forecasts for 1-month ahead is more bullish expecting 1.2985 compared to 1.2898 last week. The share of the bearish forecasts dropped to 53% from 58% a week ago and the bullish forecast dropped to 31% from previous week’s 42%.

The FXStreet Forecast Poll remained prevailingly bearish for 3-month time expecting 1.2959, down from 1.2986 last week and down from 1.3037 expected two weeks ago. The share of bearish forecast rose to 54% compared to 38% from last week and the bullish forecasts dropped to 32% compared to 43% last week. 

FXStreet Forecast Poll

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