Thursday was another volatile day for GBP/USD pair as it fell to from a high of 1.4157 to 1.4048 in Europe only to recover to 1.4117 before falling back again to end the day at 1.4056. Sharp drop in GBP/JPY cross ensured the pair had little scope to rally. Furthermore, Brexit fears also ensured the bird remained volatility. The three-month implied volatility gauge, which includes June 23 referendum rose above 16% for the first time in six years.
Odds of a weaker-than-expected manufacturing production figure are high
Manufacturing production is seen falling 0.2% m/m and 0.7% y/y. Meanwhile, industrial production is seen rising 0.1% m/m and 0.0% y/y. The odds of a weaker-than-expected manufacturing production figure are high; given the PMI manufacturing index for February had hit a 34-month low largely due to slowdown in new orders – domestic and overseas. Manufacturing sector was a drag on economic growth in Q4 2015 and thus a weaker figure could alleviate concerns regarding the slowdown in the UK economy.
Furthermore, we also have UK trade deficit figures due for release. Given the backdrop of a record high current account deficit to GDP ratio in Q4 2015, a rise in trade deficit could weigh over Pound as well. Sentiment is already bearish on Pound, thus the currency pair may dip below 1.40 handle and move towards support at 1.3924 on weak economic data releases.
More importantly, weak February PMI data released on March 1 did not result in GBP weakness. More so because the currency was oversold on Brexit fears (had dropped to 1.3835 in late Feb) and was undergoing a technical correction. As of now, the currency pair is well above 1.3835, thus a sell-off may happen on a weak economic data.
Still, bears need to be cautious even if the data is weak as Cable may find support from profit taking in GBP/JPY shorts ahead of the weekend.
Technicals – Bearish break from symmetrical triangle
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Sterling’s failure to take out falling trend line hurdles on hourly chart followed by a bearish break from symmetrical triangle formation could trigger a drop to 1.4032-1.40.
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A break lower would expose support at 1.3924 and may happen given the daily RSI has breached rising trend line support.
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Conversely, a break above 1.41 (confluence of symmetrical triangle + falling trend line) would indicate intraday bearish invalidation and shift risk in favor a rise to 1.4130-1.4140.
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Short-term bearish invalidation is seen only above 1.42
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