GBP/USD Forecast: Pound winning the ugly contest for now
|- GBP/USD has been trying to recover from the lows but has not gone too far.
- USD weakness has pushed it higher while disappointing UK has weighed.
- Tuesday's four-hour technical chart paints a mixed picture for the currency pair.
As US President Donald Trump is visiting the UK, both countries' currencies have suffered from adverse political and economical developments.
Starting from the UK, Markit's purchasing managers' index (PMI( for the construction sector has joined the manufacturing PMI in showing a contraction with 48.6 points – below the 50-point threshold that separates expansion from a squeeze in activity. The highly-regarded surveys point to further weakness and uncertainty about the economy.
The British political scene is even murkier. The leadership contest in the Conservative Party has become more complicated after international trade minister Liam Fox – a staunch supporter of Brexit – endorsed Foreign Secretary Jeremy Hunt which does not favor a hard exit from the EU.
Boris Johnson remains the leading candidate for succeeding Theresa May as PM, but his position was undermined Fox's support of Hunt. Moreover, President Trump will reportedly meet environment minister Michael Gove who also competes for the top job and wrecked Johnson's chances in the previous round.
Uncertainty about the leadership weighs on the pound.
Doubts about the person at the top persist in the US as well. Members of Trump's Republican Party are said to propose a measure to stop the president from slapping punitive tariffs on Mexico – a move that opened a new front in the trade wars. The tensions on the main front between the US and China also refuse to abate after China has issued a travel warning and continues accusing the US of the collapse of trade talks.
The intensifying spat has increased speculation of a rate cut in the US and pushed the dollar lower. This is a new phenomenon that has overtaken the previous market behavior – safe-haven flows into the US on every escalation in tensions. Saint Louis Fed President James Bullard suggested that the Fed should cut rates "soon" further weighing on the greenback.
US data has not been kinder. ISM Manufacturing PMI dropped to 52.1, implying trade wars are taking their toll. US factory orders for April are due today, but markets will be tuned to Fed Chair Jerome Powell's speech in Chicago which he may comment on monetay policy.
Overall, it is an "ugly contest" between two struggling currencies. The pound currently has the upper hand – but only just.
GBP/USD Technical Analysis
The four-hour chart shows improving conditions for GBP/USD. The currency pair enjoys upside momentum, a rising Relative Strength Index (RSI) and it has crossed above the 50 Simple Moving Average. However, it has yet to set a higher high – a move above 1.2750 is essential.
Looking up, 1.2700 capped GBP/USD in late May and is the first level to watch. Further above, 1.2820 was a swing high earlier in May, and 1.2870 was April's low.
Looking down, 1.2640 was a swing low earlier in the day and serves as an immediate support line. 1.2605 served as support in late May and also in early June. The next line to watch is 1.2560 – the lowest since January.
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