- GBP/USD has been pressured by Brexit fears but boosted by Powell's dovishness.
- The ongoing Conservative contest and UK jobs, inflation, and retail sales are due to rock the pound.
- Mid-July's daily chart indicates GBP/USD may fall to two-year lows.
- The FX Polls is showing that experts are bearish in the short term and bullish afterward.
What just happened: To the abyss and back
At 1.2439, GBP/USD has hit the lowest levels since January – and nearly the lowest since April 2017 – creating a double-bottom in the chart. The main culprit is Brexit. Bloomberg's survey of economists now projects outright contraction in the second quarter and that was only one of three factors that weighed on Sterling.
In the Conservative Party's leadership contest, Boris Johnson continues to lead the polls against Jeremy Hunt – his successor at the foreign office. The two politicians clashed in a televised debate. Johnson reiterated his commitment to leave the EU by October 31st – the current Brexit deadline – and is even willing to bypass parliament. At the same time, MPs narrowly voted to prevent the government from skipping the House of Commons – in the first vote of many.
GBP/USD enjoyed a massive rebound thanks to the weakness of the US dollar. Jerome Powell, Chair of the Federal Reserve, delivered a dovish testimony on Capitol Hill and opened the door to cutting rates at the end of the month. Powell said the outlook has dimmed, weak inflation may become persistent, and that investment has fallen among other warnings. The US dollar plunged and was further hit by the Fed's meeting minutes which indicates that many members considered cutting rates already in June.
US inflation beat expectations with the Core Consumer Price Index rising to 2.1% year on year. However, the greenback has failed to recover, allowing GBP/USD to extend its gains.
UK events: Three top-tier events
Both Johnson and Hunt may likely up the ante and attack each other's ideas as the contest nears its end. Results are due in the following week. As the former London mayor remains well in the lead, he may opt to maintain a calmer tone – contrary to his usually colorful style. The normally more moderate foreign secretary may criticize his opponent's character.
The economic calendar features top-tier events. The jobs report kicks off the week and wages remain in the limelight. Salaries have been rising at a pace exceeding 3% for several months and have been a source of satisfaction for the Bank of England. The unemployment rate has remained below 4% as of April and an upbeat figure is due in May as well.
However, the constant increase in the Claimant Count Change – known as jobless claims in other places – is of worry. May's increase of 23.2K came on top of previous rises – but has yet to translate into a rise in the jobless rate. Will it happen in the upcoming report?
Inflation figures are scheduled for Wednesday. Economists expect headline inflation to remain at an annual level of 2% – bang on the BOE's target. A drop below this level – similar to falls in prices elsewhere – may add pressure on the pound. Mark Carney, Governor of the BOE, is already leaning to dropping the bank's hawkish bias due to global headwinds. Absence of inflation at home may contribute to a decision to remove the intention to raise rates – which was never going to happen without clarity on Brexit.
Retail sales are due on Thursday and complete the trio of top-tier figures. British consumers decreased their spending in May with headline sales dropping by 0.5% and core sales by 0.3%. An increase – also driven by seasonal factors – cannot be ruled out.
Here are the events lined up in the UK on the forex calendar:
US events: US consumption in the limelight
The all-important US retail sales figures for June promise a strong start to the week. May's report beat expectations mostly thanks to substantial upward revisions for May. The upcoming figures will provide a fuller picture of the second quarter. The critical control group figure – aka the "core of the core" – is set to repeat the rise of 0.4% seen in May. Headline sales are set to rise at a slower pace of 0.3% against 0.5% reported last time.
Wednesday's Fed's Beige Book is a broad outlook on different regions' economic performance. It will likely point to slowing growth. Housing figures due on the same day may also impact the dollar if they both surprise in the same direction.
The consumer has the last word of the week in addition to the first one. The forward-looking consumer sentiment index from the University of Michigan will likely remain around the high levels just below 100 – where it has hovered around in the past few months.
Trade talks between the world's largest economies are due to continue and perhaps both sides will release more details about progress or lack thereof. GBP/USD tends to rise on upbeat trade news and fall when relations deteriorate.
Here are the scheduled events in the US:
GBP/USD Technical Analysis
GBP/USD is trading within a narrowing downtrend wedge (thick black lines on the chart). Resistance is much steeper than support and an upside break cannot be ruled out. Downside momentum has waned and the Relative Strength Index (RSI( is lifting its head. However, pound/dollar continues trading below the 50, 100, and 200-day Simple Moving Averages.
Initial resistance awaits at 1.2560 which was a swing low in May. Further up, 1.2605 was a low point in May and later capped GBP/USD in mid-June. It is followed by 1.2660 which provided support twice in June, and 1.2780 which was the high point in June.
Support awaits at 1.2505 which was June's low. Next, we find 1.2480 which was a trough in early July. Critical support awaits at 1.2439 which was the flash crash low in January and also the low point in July – a double bottom. 1.2360 is the next level to watch and it dates back to April 2017.
The FXStreet Poll shows that experts are bearish in the short term and are bullish in the medium and the long terms. The targets are rising along with the time horizon. It is interesting to note that the short-term objective has been downgraded while the long-term one has been bumped up.
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