GBP/USD Forecast: Trading the UK services PMI report

The GBP/USD pair quickly recovered from the moderate weakness in London session on Wednesday to print a daily high of 1.4093. The spot closed at a 6-day high of 1.075 levels. The dismal UK construction PMI did weigh over the pair but failed to keep it below 1.3924 (76.4% Fibo expansion of July 2014 high-April 2015 low-June 2015 high). Consequently, the corrective rally remained intact and gained pace in the NY session on broad based USD weakness. The monthly ADP report in the US also received a lukewarm response from the markets. The spot currently trades around 1.4080

Eyes UK services PMI report

The UK services PMI in February is seen dropping slightly to 55.1 from January’s 55.6. Service sector is the largest contributor to the UK economy, hence, the services PMI gets more attention than the other two figures – manufacturing and construction. Still, it is worth noting that

- Manufacturing PMI dropped to 34-month low in February and

- Construction PMI fell to 10-month low.

However, Sterling ignored the dismal data to print a 6-day high. This makes it even more vulnerable to a weaker-than-expected UK services PMI release. The sector unexpectedly grew in January as the new business rose at the sharpest rate since last July. Employment also rose to three-month high.

• Services PMI, if prints higher than January figure, (despite heightened Brexit fears) could see Cable test resistance zone of 1.4155-1.4165.

• A minor spike to 1.4130 could be seen if the PMI is in line with the estimate of higher than estimates but lower than previous month’s figure.

• Weaker-than-expected PMI could see Cable drift lower to 1.40 levels.

Technicals – strong support at 1.4032

• Sterling’s bullish price RSI divergence on the hourly chart, followed by a inverse head and shoulder breakout on Wednesday has opened doors for an upside target of 1.4165

• The Inv. H &S target of 1.4165 is also 23.6% retracement of 1.5230-1.3835.

• The level sits just above 1.4154 (38.2% of 1.4669-1.3835).

• Consequently, the area around 1.4154-1.4165 is likely to act as a strong resistance
  

• However, the hourly RSI is hitting the overbought territory and the pair is having a tough time extending gains above 1.41

• Hence, the spot is likely to test strong support at 1.4032 (10-DMA + 23.6% of 1.4669-1.3935) before moving higher
  

• Only a break below 1.4032 would shift risk in favour of a drop below 1.40 (inverse H&S neckline).

EUR/USD Analysis: Sideways channel on the hourly chart

The selling in the EUR/USD pair once again stalled below 1.0845 (61.8% of 1.0517-1.1376) on Monday helping the spot regain poise and move back to 1.0880 levels on the back of broad based USD selling in the NY session. However, the recovery stalled in Asia and the pair is trading on a back foot around 1.0860 levels.

The Euroland economic calendar is dominated by the services PMI releases across the Eurozone. However, the main event for the day is the US ISM non-manufacturing PMI release.

Eyes US ISM non-manufacturing PMI release

Traders would be interested to see if the service sector added jobs at a healthy rate in February. The employment sub index could singlehandedly shape up expectations surrounding Friday’s non-farm payrolls report. An uptick in the employment index could trigger a USD rally in anticipation of strong payrolls report and trigger a bearish break from the sideways channel support.

On the other hand, sharp drop in the employment index could help the pair take out sideways channel resistance.

Technicals – Awaits break from sideways channel

• A bearish break below the immediate support at 1.0818 could see the pair drift lower to 1.0792.

• Only a daily close below 1.0792 would shift risk in favour a drop to 1.0720 (76.4% of 1.0517-1.1376).

• On the higher side, a break above 1.0872 could open doors for a rise to 1.0890 (38.2% of 1.1495-1.0517), which if taken out could see the spot target 1.0940 (61.8% of Mar 15 - low-Aug 15 high).