GBP/USD Forecast: Bearish break from expanding triangle

The GBP/USD rose to a high of 1.5407 on Tuesday before turning lower on a weaker-than-expected UK manufacturing PMI report. The spot broke below 200-DMA and extended losses to close at 1.5302. The drop in the US ISM manufacturing report failed to provide any respite to the GBP/USD. The risk aversion in the financial markets ensured the spot remained under pressure.

GBP strength a cause of concern – PMI report

The UK manufacturing PMI report for August showed a drop in the export orders, primarily due to the Sterling exchange rate. A strong GBP, especially against the EUR is weighing over the inflow of new work from abroad since last few months. The UK services PMI due on Thursday may also highlight the negative effect of strong GBP. As for today, a slight uptick in the construction PMI could trigger a technical correction in the pair. Furthermore, the action in the EUR/GBP cross could also influence the cable. The European Central Bank (ECB) president Mario Draghi could stress readiness to do more in the wake of the slowdown in China and devaluation of CNY. In this case, the resulting drop in the EUR/GBP cross could put a floor under the GBP/USD pair.

Technicals – Bearish below 1.5360

The spot suffered another bearish close below 1.5330 on Tuesday. Sterling’s failed upside break from the multi-week range of 1.5460-1.5690 and expanding triangle, followed by a drop and a downside break from the expanding triangle indicates bears are in full control and the spot appears ready to extend the drop to 1.5088 (May 5 low). However, the loss of downside momentum due to oversold conditions on intraday charts could lead to a re-test of 1.5360 (expanding channel resistance). Above 1.5360, fresh offers could hit the pair. A failure to sustain above 1.5360 could be followed by a renewed sell-off below 1.53 levels. Only a daily close above 1.5424 (Aug 7 low) could offer respite to the GBP bulls.

EUR/USD Analysis: ECB could be a non-event

The EUR/USD pair rose to a high of 1.1332, followed by a drop to 1.1250 in the European session and a move back to 1.1330 levels on the back of a risk aversion on the Wall Street and weak US data. The EUR’s funding currency status was once again highlighted on Tuesday as carry unwind pushed the EUR/USD higher.

Focus on ECB, mild Jawboning expected

The ECB is widely expected to keep rates and other unconventional policy measures unchanged. President Draghi is likely to reiterate that the QE program is working fine, but may come out more dovish by stating downward pressure on inflation and export growth (as retaliation to CNY devaluation). Eurozone core inflation has stayed upbeat and thus a drop in the headline figure due to lower energy prices and commodity prices is likely to be viewed as net positive for Eurozone consumer. Furthermore, aggressive words are not required at the moment, as the final August PMI report showed an inflow of work from abroad is strong due to favourable EUR exchange rate. Consequently, Draghi could express readiness to do more if required (due to slowdown in China, fall in CNY and possible effect on exports). However, the central bank is likely to sound upbeat in the economy and thus, the ECB is likely to be a non-event.

Heading into the ECB event, the EUR could remain under pressure as the financial markets are calm today. Chinese stocks, after opening down 4% today, recovered losses to trade on a positive note at lunch break. The major US index futures and European futures are up 1%. Consequently, EUR could drop as carry unwind is likely to halt.

Technicals – Symmetrical triangle on hourly chart

Euro, trading around 1.1285, awaits a break from the symmetrical triangle seen on the hourly chart. A break above 1.1311 (upside break) could push the spot higher to 1.1342 (inverted head and shoulder neckline). Only an hourly close above 1.1342 would reinforce bulls and open doors for a rally to 1.14 levels. On the downside, a break below 1.1275 (downside break from symmetrical channel) could push the spot back to 1.12 levels. The drop could be sharp in the case upside break from symmetrical triangle is followed by a failure and drop from the inverted head and shoulder neckline. In such a case, the pair could re-test Friday’s low of 1.1155.