Dull UK data throughout the week
The week gone by provided little reason for GBP bulls to cheer. The forward looking PMI reports continue to show the slowdown in the manufacturing and services sector. The main highlight was the drop in the new work in both manufacturing and service sector. The new work from aborad took a hit due to the Sterling exchange rate.Meanwhile, the US produced mixed economic data. The NFP released today showed uptick in the wages and drop in the unemployment rate to 5.1% (full employment level as per the Fed). The manufacturing PMI reports were slight disappointment, although service sector activity remained positive.
Less scope for Sterling to bounce back next week
The UK industrial production data for July could confirm the slowdown in the activity highlighted by the July PMI reports. Moreover, the industrial production could be overshadowed by the UK trade deficit figures. The deficit could rise, once again confirming the negative impact of the Sterling exchange rate as highlighted by the PMI reports since May 2015. Meanwhile, the BOE rate decision is likely to be a non-event. If anything, only a GBP bearish surprise can come through in the light of dovish ECB, turmoil in China and CNY devaluation.Also, Chinese traders return to the markets from Monday. Given the fall in Asian markets today, the probability of further risk aversion increases with Chinese markets open next week. Once again, the risk aversion would weigh over GBP/USD. Sterling, like the US dollar is perceived as a risk currency. Consequently, markets ditch Sterling in times of risk aversion (which could delay the Fed rate hike and BOE rate hike). However, the safe haven appeal of Treasuries could once again make sure the USD stays in demand. Thus, the net effect of the risk aversion is the drop in the GBP/USD pair. Furthermore, a spike in EUR/GBP due to carry unwind also weighs over the GBP/USD pair.
Technicals – Bulls require a daily close above 1.5360
In last nine sessions, including today, Sterling has –
- Witnessed failure to sustain an upside break from multi week range of 1.5460-1.5690 and expanding triangle
- It was followed by a downside break from multi week range and expanding triangle
A close below 1.5219 (100% Fib extension of June high-July Low-Aug high) would add to bear strength and open doors for an immediate sell-off to 1.5088 (May 5 low).
A technical correction seems possible due to oversold conditions on the intraday charts, in case the spot manages to sustain above 1.52 levels. However, the recovery appears capped at 1.5360, followed by a sideways action and a fresh drop towards 1.5 levels.
As per charts – downside breakout from expanding triangle – the spot is likely to drop to 1.50 levels.
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