GBP/USD: Trading the UK services PMI report

The GBP/USD pair witnessed a bearish break from the daily charts on Wednesday. The first blow to Sterling came in the form of the construction PMI, which printed at multi-month lows. The cable fell to 1.50 levels and extended losses further to a session low of 1.4895 levels on the back of a stellar US ADP private sector employment report and hawkish comments from the Fed’s Yellen. Profit taking helped the pair recover off lows to end the day at 1.4950.

Focus on UK services PMI

The third and most important PMI – services, is due for release today. Both the manufacturing PMI and construction PMI were weaker and carried dismal new work inflow and employment details with them. Services activity accounts for a major part of the UK economy and thus a weaker-than-expected print would be the final nail in the coffin for the Sterling bulls. The services PMI for November is seen largely unchanged at 55.00 compared to Oct’s 54.9.

As said earlier, the pair has already suffered a bearish break from the falling channel on the daily. So a weaker-than-expected services PMI would be enough to send the pair well below 1.49 handle.

On the other hand, anything above 55.00 could trigger a minor technical correction, since the pair is oversold on the intraday charts. The magnitude of the technical correction would depend on the positive gap between the actual PMI figure and the expected PMI figure.

Ahead of the PMI report and after the effect of the UK PMI has played out, the action in the EUR/GBP (ahead of the ECB rate decision) could influence the GBP/USD pair.

Technicals - Bearish break, but oversold on intraday charts

• Sterling’s sharp fall from the Nov 19 high of 1.5336 to a low of 1.4895 has left the currency oversold on the intraday charts.

• The currency pair could witness a minor technical correction to 1.4972 (falling channel resistance). A failure to take out/sustain above the same would keep the risk of a sell-off to sub- 1.4888 (76.4% of Apr-Jun rally) level intact. Under the same, the pair could test 1.4856 (Apr 21 low).

• Only a surprisingly strong UK PMI report could ensure the pair sustains above 1.4972 and extends gains to 1.50 handle.

EUR/USD analysis: Risk of short-unwind, the ECB may undershoot expectations

The EUR/USD pair fell to a low of 1.0551 on Wednesday on the back of a weaker-than-expected annualised core CPI and headline CPI and due to a stellar US ADP report. However, the common currency witnessed a short covering rally to 1.0618 in the NY session, but fell again in Asia today to 1.0590 levels.

All eyes on ECB, services PMI could be non-event

The services PMI reports are due for release across the Eurozone. The EUR/USD pair may move few pips here and there after services PMI release, but the major action is likely to be seen after the ECB rate decision. As discussed here (), a case of unwinding of the EUR shorts appears compelling.

The odds of the ECB undershooting the expectations inched higher after the Bloomberg report released yesterday said the bank is unlikely to announce a major change in its economic forecasts; which also indicates a low probability of the aggressive action.

It is worth noting that the ECB has often let out it its major policy decisions a day before the official announcement.

• Bloomberg carried a report detailing the OMT announcement ahead of the Sep 6 2012 meeting

• Bloomberg was also out with a report detailing the ECB’s action a day before the January 2015 meeting.

On both the occasions, ECB’s actions were in line with the Bloomberg reports released a day earlier. So it is quite possible that the ECB may keep its economic forecasts largely unchanged and refrain from announcing aggressive measures except what is already priced-in – deposit rate cut and a minor tweak in the QE program.

Technicals – Broader range – 1.0808-1.0390

Euro could spike to 1.0808 (July 2015 low) in case the ECB undershoots expectations. On the other hand, aggressive ECB action could send the pair down to the trend line support at 1.0390.