The Dollar Forecast Is Bullish, Get On Board While You Can

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Pound-to-Australian Dollar: A Bullish Setup on the Charts, Week Ahead Forecast

The Pound-to-Aussie rate could move higher this week as a lack of market-moving data down-under combines with an easing of fears over the Brexit negotiations and a bullish technical picture for GBP/AUD.

After bottoming in October 2020, the Pound-to-Australian Dollar has been moving steadily higher in an ascending channel that is visible on a weekly chart.

Whilst the channel looks somewhat vulnerable, it continues to rise steadily and within it, the exchange rate is also rising and showing bullish potential.

The daily chart (see below) shows a possible bullish flag pattern, which would suggest a break higher is on the horizon and an extension of roughly the same length as the ‘pole’ is likely, with a probable end-target at the upper channel line at 1.7775.

Furthermore, the pair has just completed a three-wave abc correction (see chart) after peaking in late September, and given the correction is finished, we would now expect a move higher to evolve.

Abc patterns are made up three waves which fall in a zig-zaging corrective pattern in which the first and third waves are normally of a similar length, and once finished the previous uptrend resumes.

In addition, the Pound-to-Australian Dollar exchange rate has formed a two-bar reversal pattern during its last two days (circled), which is when the exchange rate falls in a long red bar and then rises on the next immediate period in an equally strong green up bar.

These patterns are bullish indicators.

The location of the two most significant moving averages – the 50 and 200-day MAs – at the lows of the two bar reversal are further evidence that the exchange rate is likely to rally because these moving averages provide underpinning support to the exchange rate which is, therefore, more likely to rise.

MA’s also present formidable obstacles to further downside due to short-term traders using them to trade counter to the dominant trend in expectation of prices being rebuffed by them.

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Data, and Events that Could Move the Australian Dollar

The Australian Dollar was supported in the previous week by outflows from New Zealand following the election – outflows which sought a home in Australia, providing an explanation for why AUD/NZD rose to a 17-month high.

Australian data, especially employment data, is particularly strong at the moment, suggesting the Reserve Bank of Australia (RBA) may not be able to keep their avowed neutral stance for as long as they said, however, there were no signs in the monetary policy meeting statement last week to suggest a hawkish shift has occurred yet.

Looking ahead, the main release in the coming week is inflation data, out at 1.30 BST on Wednesday, October 25.

Inflation is forecast to rise to 2.0% year-on-year from 1.9% previously, which means compared to Q3 in 2020.

Quarter-on-quarter (which means compared to the previous quarter, or Q2 in this case) the inflation rate is forecast to rise by 0.8% compared to 0.2% in Q2.

“Australian inflation data is scheduled for release and while important we’re not sure how much impact it will have on AUD as the RBA maintains a firmly neutral policy stance,” said BK Asset Management’s Kathy Lien, in relation to this release.

Data, and Events that Could Move the the Pound

Politics will still figure highly for Sterling in the week ahead.

Whilst the EU decided at their summit last week that not enough progress had been made to move to phase 2 discussions on trade, there was a silver lining in the form of EU Council President Donald Tusk who was optimistic about a deal.

Tusk said he thought descriptions of talks as being at “deadlock” were exaggerated, that the EU would start internal preparations for phase 2 as a concession to the UK, and that he hoped the second phase would begin in December when the EU will have another summit to decide whether to go ahead with phase 2.

The Pound recovered on Tusk’s more optimistic comments after having sold off almost all week, and we think there is a chance of a ‘Tusk bump’ on Monday as the market starts to see a light at the end of the Brexit tunnel.

Tusk’s optimistic tone regarding Brexit was mirrored by the leader of Europe’s largest economy; Germany’s Angela Merkel suggested much of the gloom and angst surrounding Brexit is a function of British media coverage.

Merkel’s view is that talks are certainly not in deadlock.

We agree that media and markets are prone to focussing on the negatives at the expense of the more optimistic elements of talks. A classic example is the fixation with EU lead negotiator Michel Barnier’s use of the word ‘deadlock’ following the fifth round of talks. Barnier did also say he believed a breakthrough was still likely before year-end.

The Pound was sold and newsprint almost focussed purely on the negative, this leaves the Pound relatively oversold and prone to upside corrections when reality dawns.

The main hard data release for the Pound will come in the form of the first release for third quarter GDP, out at 9.30 BST on Wednesday, October 25.

The consensus estimate is for GDP to grow at 0.3%, but the result could make the difference between whether the Bank of England (BOE) hikes rates or not in November.

“PMI data suggest the GDP numbers will show another lacklustre 0.3% expansion in the three months to September, matching the performance seen in the first half of the year. Even such a modest GDP expansion would be unlikely to change the views of the hawks on the Monetary Policy Committee, but a weaker number could lead to rates remaining on hold at the November meeting. A stronger number would be seen by many as sealing the deal on a hike,” says Bernard Aw, Principle Economist at IHS Markit.

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Bullish British Pound To Dollar Rate Today On Better-than-Forecast UK Sales

Although the mood towards the Pound had softened the GBP USD exchange rate returned to a bullish trend in the wake of better-than-expected retail sales data.

Investors were encouraged to pile back into Sterling as sales leapt 1.4% on the month, indicating that consumer spending had remained healthy even as inflationary pressures began to weigh on households.

Wednesday’s trade saw GBP/USD slip slightly from its weekly highs but remained above the week’s opening levels.

The US home sales report ended the trend of better-than-expected US data by falling from 5.69m to 5.48m and missing the forecast print of 5.57m. The latest mortgage applications data from MBA showed a contraction of -2.7%.

Even though markets seem increasingly concerned that the Trump administration will not deliver on its promised policies the Pound US Dollar exchange rate weakened on Wednesday.

After BoE Governor Mark Carney played down the importance of February’s inflation data confidence in the Pound faltered, with interest rates still likely to remain at their historic lows for longer.

Cautious Fed Comments Boosted GBP USD Exchange Rate

The Pound US Dollar exchange rate received a strong boost in the wake of comments from Chicago Fed President Charles Evans.

This added to the impression that the central bank will not pursue a particularly aggressive pace of monetary tightening, with only two more interest rate hikes to come over the course of the year.

Confidence in the US Dollar slumped as a result, with investors seeing little particular reason to favour the currency as a degree of uncertainty continues to surround the US administration.

Pound Bullish After Stronger UK Inflation

Demand for the Pound, meanwhile, surged on the back of a stronger-than-expected UK consumer price index report.

Inflation was found to have risen to 2.3% in February, returning to the Bank of England’s (BoE) target and reaching its highest level since September 2020.

This increased speculation that the BoE could take a more hawkish view on monetary policy in the coming months, even though policymakers have pledged to allow some overshoot of the inflation target as a result of the Brexit vote.

As James Smith, economist at ING, noted:

‘Despite the surprisingly hawkish shift in the Bank of England’s stance last week, we suspect that concerns about surging inflation will be gradually outweighed by the slower growth backdrop. We don’t expect any change in Bank rate before the end of 2020.’

Nevertheless, the GBP USD exchange rate extended its bullish run throughout Tuesday’s European session.

Weak Housing Market Could Limit US Dollar Demand

Further volatility is likely for the US Dollar as a number of other Fed policymakers are due to speak this week, with investors hoping for some indication that a faster pace of monetary tightening might still be on the cards.

However, the latest US housing market data is unlikely to offer any particular support to the softened ‘Greenback’.

New home sales are forecast to have slowed on the month while existing home sales are expected to have contracted -2.3%, suggesting that consumers are in a less positive mood.

The GBP USD exchange rate could extend its recent gains further if Thursday’s UK retail sales data proves encouraging.

Even though consumers are set to see an increasing squeeze this year sales are thought to have picked up further in February, supporting a strong first quarter for the economy.

GBP USD Data Releases

13:00 USD House Price Index (MoM)

14:00 USD Existing Home Sales (FEB)

09:30 GBP Retail Sales (MoM) (FEB)

09:30 GBP Retail Sales (YoY) (FEB)

12:00 USD Fed’s Yellen Speaks at Community Development Conference

12:30 USD Initial Jobless Claims (MAR 18)

12:30 USD Continuing Claims (MAR 11)

14:00 USD New Home Sales (FEB)

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As well as producing in-depth analysis of the latest currency trends for ERUK, Colin heads up the Business.

Need to Know

Barbara Kollmeyer

2020, here we come.

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All is merry and bright.

Will we get the start of a Santa Claus rally? That is, typical late-year gains for stocks around the holidays. It may depend on this trade deal action, as investors wait for news from China. That’s as another lingering concern for markets may have just been swept away—the U.K. Conservative Party cruised to victory and smoothed the path for a long-delayed Brexit.

Our call of the day, from investment firm BTIG’s chief equity and derivatives strategist Julian Emanuel involves what appears to be the S&P 500 forecast on Wall Street—3,450 by the end of 2020.

“It’s absolutely shocking to us that it’s the most bullish forecast on the Street. And the fact that it is the most bullish leads me to believe that we’re probably going to be too low,” Emanuel tells MarketWatch in an interview.

His upbeat view is based on a strongish economy and a Federal Reserve that is “clearly committed” to seeing inflation move higher, which means the economy may run above potential growth for a while. Then there is the historical data that shows the years that follow 20% or more tend to average returns of 14.3%, says Emanuel.

And if the rumored trade deal materializes, it means the S&P may reach his upper year-end target of 3,950 “particularly if there is upside to the deal being ‘bigger’ than the market expects,” he said.

As well, the recent advent of zero-fee online stock trading from Charles Schwab SCHW, +2.61% and others has made the media and investors “focused on the idea of investing once again.” That may just combine with an end-of-the-bull-market run where investors have historically piled into assets, he says.

The market

The Dow DJIA, +2.19% , S&P SPX, +2.23% and Nasdaq COMP, +1.22% are down in early action as investors await word from China on trade talks. Asian stocks ADOW, +1.25% rallied and Europe SXXP, +1.57% also had a powerful day, while the pound GBPUSD, +0.56% gave up some hefty gains it saw after those U.K. election results.

The chart

Bank of America Merrill Lynch’s Flow Show note reveals investors primed for gains in the first quarter of the year. Its contrarian Bull & Bear indicator chart has reached an 18-month high of 5.4, as investors turn bullish.

Its gauge indicates whether buying or selling of stocks has gone too far either way. The closer the needle nears 0—least bearish—and closer to 10—most bearish. The rule: when investor sentiment is over 8, sell equities, and under 2—buy.

The tweet

That is President Trump offering congratulations and a potential trade deal to U.K. Prime Minister, Boris Johnson who nailed a crunch election.

The buzz

China is staying silent on whether a U.S. trade deal has been reached. The situation remains “delicate,” tweeted Hu Xijin, the influential editor in chief of China’s state-controlled Global Times.

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Adobe ADBE, +0.65% stock is headed for record highs after the software group’s upbeat revenue gains, while shares of chip maker Broadcom AVGO, +0.53% are up after its outlook topped forecasts.

Amazon AMZN, -0.20% is now offering the voices of celebrities like Samuel L. Jackson to pipe up when users summon the e-commerce company’s virtual assistant Echo.

Retail sales fell short of forecasts, while import prices saw the biggest increase in six months, Business inventories are still to come.

Random reads

Experts say we need to reach ‘peak meat’ consumption in 10 years to battle climate change

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Dollar headed for ‘multi-year rally’

Investors are becoming increasingly bullish about the U.S. dollar in anticipation of a stronger economy later this year.

The newfound enthusiasm for the buck follows a choppy period as investors prepare for the Federal Reserve to eventually unwind its stimulus program.

Depending on how the economy performs, Fed chairman Ben Bernanke said Wednesday that the central bank could begin tapering its bond buying program by the end of this year.

The remarks sent the dollar higher against its main trading partners as stocks fell and bond yields rose.

“The dollar is the king of castle, extending yesterday’s post-Fed rally across the board,” said Marc Chandler, head currency strategist at Brown Brothers Harriman.

Although the Fed trimmed its outlook for economic growth this year, traders seemed to take Bernanke’s comments as confirmation that the recovery is gaining momentum. At the same time, market volatility is expected to remain high for now, which should help boost the dollar. The CBOE Market Volatility Index ( VIX ) spiked 10% Thursday.

The big picture. Beyond the immediate Fed driven moves, many investors say the dollar will push higher as the economy continues to strengthen.

“The factors are coming together for a mutli-year rally in the dollar,” said Paresh Upadhyaya, senior currency strategist at Pioneer Investments.

For one, the U.S. economy is expected to grow faster than most developed economies in the world, said Upadhyaya.

In addition, the U.S. government appears to be getting its fiscal house in order sooner than anticipated, thanks largely to forced budget cuts that took effect earlier this year.

The federal deficit is expected to fall to 4% this fiscal year, and drop to 3% by 2020, according to the Congressional Budget Office. That’s substantially lower than the CBO had predicted in February.

And the boom in domestic energy production could reduce the nation’s trade deficit and external financing needs.

“The energy independence story is a very big story as far as dollar is concerned,” said David Woo, head of global rates and currency research at BofA Merrill Lynch.

The volatility factor. In the sort-term, the dollar could benefit from its reputation as a safe haven as concerns about the Fed keep investors on edge, according to analysts at Societe Generale.

“The combination of stronger data, Fed exit fears and shaky risk conditions should prove positive for the U.S. dollar this summer,” the analysts said in a recent report.

The analysts said investors should look past the recent pullback, which was driven largely by investors unwinding positions in emerging markets following a rise in interest rates.

Even with that retreat, the dollar is the third-strongest currency so far this year, according to SocGen. The euro has been number one, followed by the Mexican peso.

Carry trade? Eventually the rise in U.S. interest rates should give the dollar an advantage over currencies in countries that have lower rates as investors execute so-called carry trades, which use the currency of a country with exceptionally low rates to buy higher yielding assets.

The trade allows investors to earn interest while potentially making a profit on riskier bets. But it only works if investors are upbeat about the prospects for a global economic recovery.

Jens Nordvig, head fixed income and currency strategist at Nomura, said interest rates are still too volatile to make this trade safe.

He said rates should stabilize over the next few months as the shock of a potential exit by the Fed filters through the financial system. “That will be the time to get aggressive.”

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