GBP/USD Forecast: Run up to Brexit finale is set to drive Sterling

• The GBP/USD rose to 1.3100 after the mix of rumors of Brexit negotiators saying the deal is “very close” and disappointing headline non-farm payroll number in September.
• Brexit negotiators are set to work over the weekend with the UK Brexit Secretary Raab visiting Brussels on Monday, October 8.
• The US employment report saw lower than expected non-farm payroll increase, but the unemployment dropped to 3.7%, the lowest level since legendary Woodstock in August 1969.
• Clustering FXStreet Forecast ranging from 1-week to 3-months reflect increased uncertainty of Brexit negotiations.

The GBP/USD is trading little changed on the upside at around 1.3080 at the end of the first week of October as the US September non-farm payroll headline figure disappointed while the Brexit headlines kept the chances open for the UK getting the Brexit deal with EU on time.

The first week of October also saw UK PMI data for construction and services disappointing in September, while manufacturing PMI rose above expectations. Nevertheless, with only a few weeks left for the UK to strike the Brexit deal with the EU, the attention turned to the ruling Conservative party annual convention in Birmingham.

Conservative party annual conference first saw Boris Johnson, former UK Foreign Secretary and the main political rival of Prime Minister Theresa May unexpectedly calling for support for Theresa May while expressing doubts about the Chequers plan (Chequers plan was a formal reason why Boris Johnson decided to step down). 

The main policy speech was expected from the UK Prime Minister Theresa May, but her dancing on the stage to Abba’s “Dancing Queen” brought no major policy announcements. 

May’s headline proclamation was a political one, saying that the UK is ready to leave negotiations with the EU with no deal if it has to, putting pressure on European officials ahead of key Brexit discussions over this weekend and over the course of next week. With manufacturing output and monthly UK GDP data expected over the course of the second week of October only, the main market moving factor is once again come from Brexit negotiations.

On the UK macro front, the UK PMI figures for manufacturing, construction, and services had limited market reaction with manufacturing PMI rising to 53.8 in September while the UK construction PMI decelerated to a six-month low od 52.1and services PMI decelerated to 53.9 in September, in line with market expectations.

The UK services PMI and Index of Services

On the other side of the Atlantic, the  Federal Reserve chairman Jerome Powell indicated further rates hikes this year and along with other Fed official confirmed the fundamental strength of the US economy. The combination of solid economic prospects and further rate hike indication saw the US benchmark Treasuries selloff with yields rising to the highest level in seven years of 3.22%.  

The US September employment report was the headliner on the macro front in the US last week. After the private ADP employment report saw the number of new jobs rising well above expectations, the total number of 134K new jobs in September was perceived as a disappointment, even as the unemployment rate dropped further to 3.7%, the lowest level since December 1969 and consistently since Woodstock festival times in summer of 1969.

US unemployment rate

Related articles

 

• In the Brexit stormed UK, political uncertainty overweighs any positive macro news
• Summary of recent comments from Fed officials

Technical outlook

GBP/USD daily chart

The technical picture for GBP/USD is neutral with the GBP/USD moving within a 50-day moving average of 1.2972 and a 100-day moving average of 1.3110.While the US Dollar is fundamentally well supported, Brexit headlines are expected to have the most powerful impact on the currency pair. While technical oscillators including Momentum and the Relative Strength Index are flat and in the neutral territory on a daily chart. Slow Stochastics made a bullish crossover in the Oversold territory, possibly indicating corrective move higher. Still, the GBP/USD is now trapped once again within a 50-day moving average of 1.2972 and a 100-day moving average of 1.3110. 

Fed speak and US inflation in the week ahead

Apart from the US labor market, the most important feature during the first week of October was the concentration of various Federal Reserve Bank official publically speaking during the week. All Fed speakers, including the Federal Reserve chairman Jerome Powell, basically agreed that the US economy is living exceptionally good times with bright outlook going further. Federal Reserve’s chairman Jerome Powell’said on October 3rd, that “we may raise rates past “neutral” territory as they need to gradually move towards normal”, indicating further rate hikes are coming. 

During the second week of October, some more Fed officials are expected to speak including New York Fed President John Williams who is scheduled for Wednesday. The US inflation headlines Thursday with core inflation expected to accelerate in September to 2.3% y/y.

Consumer confidence and Raphael Bostic speech conclude next week in the US.

US economic calendar October 8-12

In the UK, there are only a few important economic releases due, both scheduled for Wednesday. The UK manufacturing output is expected to rise 0.2% over the month in August while increasing 1.5% over the year. The freshly established monthly reading of GDP for August is also expected to rise 0.2%.

More importantly, the Brexit negotiations are expected to heat up next week with the Brexit summit scheduled for October 17. Brexit negotiations are set to continue over this weekend before the Brexit Secretary Dominic Raab heads for Brussels next week on Monday.

The UK negotiating standpoint voiced by Raab is clear. The UK cabinet opposes any new regulatory barrier between Northern Ireland and the rest of the UK.

Before the European Union officials meet for the Brexit summit on October 17, the EU chief negotiator Michel Barnier is scheduled to present draft political declaration on Brexit on October 10.

UK economic calendar October 8-12

FXStreet Forecast Poll

While the FXStreet Forecast Poll expected GBP/USD to be bearish during the first week of October, only the first few days saw Sterling under pressure and by the end of the week, the FX rate rose to 1.3080, about 100 pips higher compared to last week's poll. 

For the second week of October, the FXStreet Forecast Poll is bullish with 56% of forecasters expecting an uptrend with the end of next week FX rate of 1.3078.

Forecasts for 1-month and 3-months ahead are bearish this week with 1.3042 and 1.2983 expected. With Brexit negotiations weighing on Sterling, little spread for the forecasts ranging from 1-week to 3-months reflects increased uncertainty of the result.

FXStreet Forecast Poll