GBP/USD forecast: Eyes UK services PMI

The GBP/USD pair fell to an intraday low of 1.5557 on Tuesday and extended losses to 1.5526 in the Asian session today after Atlanta Fed Dennis Lockhart expressed his support for a rate hike in September. Lockhart is widely viewed as a dovish/neutral and hence his comments led to a broad based strength in the US dollar. The bearish pressure on Sterling was triggered in the European session after the data showed the UK PMI construction retreated to 57.1 in July from 58.1 in June, lower than analysts’ forecasts of 58.6.

2-year yield reversed Friday’s fall

The two year yield is back to 0.74%-0.75%, reversing all the fall that followed a surprisingly soft report on US wages out Friday. A break above 0.75% could further encourage the USD bulls. On the data front, the UK services PMI (expected 58, previous 58.5) for July is due for release today. A weaker-than-expected figure amid the uptick in the treasury yields could push the spot lower to 1.5470. Services activity, being the biggest contributor to the GDP, could again show a drop in the new export orders on account of a strength in the GBP (especially against the EUR). Ahead in the day, the focus will be turned to the ADP employment report later today. The ADP report is expected to show 210k growth in private sector jobs in July.

Technicals – Bearish break on 4-hour chart

The 4-hour chart confirmed a break below the triangle formation with RSI bearish below 50.00. Thus, the doors are open for a sell-off to 1.55 handle, a break below which could push the spot lower to 1.5470. Moreover, a failed attempt to rise back in the triangle could be followed by a sharp sell-off to 1.5470 levels. On the higher side, an hourly close above 1.5568 (38.2% of Jul 14- Apr 15 plunge) could lead to a re-test of 1.56 handle. Only a better-than-expected UK services PMI figure could ensure the spot takes out 1.56 and nears 1.5638 (38.2% of June rally).

EUR/USD Analysis: Consolidation with downside bias

The EUR/USD pair was dumped to a low of 1.0848 after having failed to sustain above 1.0964 (50% of Mar-May rally) on Tuesday. The 2-year Treasury yield recovered Friday’s losses to trade around 0.74% after the Atlanta Fed’s Dennis Lockhart expressed his support for a rate hike in September. The focus now shifts to the batch of services PMI reports due for release across the Eurozone.

Focus on PMI and treasury yield curve

The treasury yield curve has steepened in the Asian session today. The 10-year and 30-year yield is up 2.8 and 1.7 basis points, respectively, while the 2-year is up 1.6 basis points. The EUR could be offered once again in case the 2-year yield starts running up faster than the yields at the long end of the curve. Moreover, the yield curve could flatten if the ADP report shows the private sector added more than 210K (expected) jobs in July. The spot could also weaken ahead of the ADP report if the services PMI reports across the Eurozone fail to meet expectations. The reports are widely expected to show strong inflow of new work orders and rise in imported inflation. The EUR retail sales data could also influence the pair.

Technicals – Hourly RSI oversold

The sharp sell-off has pushed the hourly RSI into the oversold territory, still, the prices struggle to recover above the key resistance on the hourly chart at 1.0869. On the downside, 1.0845 (61.8% of Mar-May rally) is providing support to the pair. A break below the same could open doors for 1.0808 (July 20 low), although further losses are unlikely due to oversold RSI indicator. Meanwhile, a break above 1.0869 could see the pair re-test 1.0920 (July 31 low). A daily close below 1.0808 (July 20 low) would be an additional proof that the downtrend from the June high has resumed.