GBP/USD Weekly Forecast: UK manufacturing and monthly GDP unlikely to move Sterling away from the corrective trap

• The UK forward-looking indicators point to a solid mid-year recovery in the economic activity in the UK.
• The Bank of England Governor Mark Carney is upbeat on the economic growth in the UK making August rate hike a real option.
• The manufacturing output is unlikely to alter the view of Sterling trapped in corrective mode against the US Dollar in the week ahead.
• The Bank of England Governor Mark Carney and Deputy Governor Jon Cunliffe are both scheduled to confirm current stance of economic optimism with no monetary policy outlook hints. 

The first week of July saw Sterling rising from 1.3100 level towards 1.3280 with the activity in manufacturing, construction and services all improving in June while the Bank of England Governor Carney was upbeat on the UK economy, making the August rate hike a real option.

The main risk factor for Sterling remains Brexit-related uncertainty that has been accentuated last week by the failure of the UK Prime Minister to deliver the plan for what will be the replacement of customs union with the EU after Britain definitely leaves the European Union in April next year. Theresa May’s plan failed to find support within her own government and it has also been rejected by German Chancellor Angela Merkel.

The overall stalemate in Brexit negotiation was also confirmed by European Union's chief Brexit negotiator Michel Barnier, who said that major withdrawal issues are still outstanding in Brexit talks.

The main economic release of the first week of July for Sterling was the US labor market report for June that saw 213 thousand new jobs added in the US economy in June, that exceeded 195 thousand expected and also 177K foreran by the ADP employment report earlier last week, but the wage growth missed the expectations and with the participation rate rising also the unemployment rate picked up 4.0% in June from 3.8% in the previous month.

The GBP/USD was trading in mid 1.3200s, up some 0.3% against the US after an hour after the US labor market report was released, up some 100 pips from the Monday’s open of 1.3158.

The UK services PMI and Index of Services

On the macro front, the fundamental support for Sterling came from better than expected reading of manufacturing, construction and mainly services PMIs that all surprised on the upside for June. The PMI development was broadly in line with what the Bank of England policymakers have been saying in their recent speeches, confirming all that the first-quarter slowdown was just an adverse weather-related blip. 

Technically, breaking  1.3100 level on the upside saw the currency pair in consolidation mode last week with 1.3100 representing 38.2% Fibonacci retracement of a post-Brexit slump from 1.5020 to 1.1940 now became the support level for GBP/USD. With technical oscillators pointing upwards, the test of higher levels is likely on a daily chart. Breaking below psychological 1.3280-1.3300 level will open the way for 1.3350 and 1.3480 representing swing high and 50% Fibonacci retracement of the above mentioned post-Brexit slump.

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UK PMI summary: Ongoing rebound in economic activity elevates the rate hike chances
The Bank of England Governor Carney optimism about growth makes rate hike chances clearer

UK macro data and Carney’s speech

The UK macro data in the first week of July concentrated on the economic activity across main economic sectors. The UK manufacturing PMI from IHS/Markit rose to 54.4 in June, broadly unchanged from 54.3 in May, while the UK construction sector PMI rose to a 7-month high of  53.1 in June, up from 52.5 in May.

The most relevant though is the activity in the UK services sector as it accounts for 79.3% of UK GDP in 2015, according to the Office for National Statistics. The UK services PMI rose to 55.1 in June, the highest level since October of 2017.

The revival of the economic activity has also been reflected in views of the Bank of England Governor Mark Carney who spoke to the business leaders of North Anglia on Wednesday expressing optimism about the economic outlook in the second half of this year. Although Carney said the Monetary Policy Committee (MPC) will have all the economic data available at the time of releasing the August Inflation Report on August 2, he refrained from any rate hike hints and basically repeated the message from June MPC meeting.

Carney made no direct policy changes hints in his speech, the market reaction was Sterling positive as the affirmative tone of Carney’s speech aligns with the Bank of England’s hawkish twist in June, when the number of voters favoring the rate hike increased to three policymakers with Bank of England chief economist Andy Haldane joining in the camp of external hawks Ian McCafferty and Michael Sauders to form 6-3 voting pattern.

Technical analysis

GBP/USD daily chart

The daily chart saw GBP/USD rebounding decisively above 1.3100 representing 38.2% retracement of the post-Brexit slump from 1.5020 to 1.1940 in what is seen as a corrective move. While Momentum is crawling to the upside around the zero neutral line, technical oscillators like Relative Strength Index leaped off the oversold territory and turned higher with GBP/USD correcting from 1.3050 towards 1.3270 at the end of the last week of June and in the first week of July.  The GDP/USD was unable to cross substantially below 1.3100 and with correction continuing it is likely to face 1.3300 before testing key 1.3480 level representing 50% Fibonacci retracement level of the post-Brexit fall. The GBP/USD is still trapped in ranges formed by 38.2% and 50% Fibonacci retracement of the above-mentioned move at 1.3100 and 1.3480. The death star crossover of the 50-day and 100-day moving average on the daily chart indicates further downside potential for GBP/USD first attempting to break again 1.3100 represented by 38.2% Fibonacci retracement of the post-Brexit slump from 1.5020 to 1.1940. 

GBP/USD 1-hour chart

With the spot rate leaping up to 1.3280 from 1.3095 last week’s lows, the technical picture on GBP/USD on the 1-hour chart is also turning bullish, with the currency pair breaking away from the downward sloping channel to form new upward trending channel. The technical oscillators already turned higher with Slow Stochastics rising up towards the overbought territory and both Momentum and the Relative Strength Index rising higher. With break above 1.3200 GBP/USD is seen testing 1.3280 and the round big figure of 1.3300-1.3350 as next hurdle representing swing high and the upper boundary of the upward rising channel trendline. 

Economic fundamentals in the week ahead

The UK macro calendar includes the UK manufacturing and industrial production data for May due on Tuesday, July 10. At the same time, the UK will be releasing the monthly GDP data for the first time ever.

While UK manufacturing output is expected to rise 0.3% over the month in May and the index of manufacturing and industrial production increasing 0.4% m/m, the monthly GDP is expected to increase by 0.2% in the initial estimation.

Other than these data, the policymakers speeches are due, including the Bank of England Governor Mark Carney scheduled to speak about the global financial crisis at the National Bureau of Economic Research conference, in Boston on Wednesday.

The Bank of England Deputy Governor Jon Cunliffe is set to speak at the regional visit to North West, in Kendall on Friday next week.

UK economic calendar for July 9-13

On the other side of the Atlantic, the second week of July will see the US inflation data scheduled for Thursday next week, July 12. 

The set of Fed policymakers are scheduled to speak next week including three public appearances of the Federal Reserve non-voting Dove Neel Kashkari, who is seeded to speak three times next week.

The week after the FOMC meeting minutes that confirmed the gradual path of policy normalization, the non-voting Fed Governors speaking are destined to become non-movers.

US economic calendar for July 9-13

Forecast for the next week

The FXStreet Forecast Poll for this week missed as the last week’s prediction by 110 pips as the spot rate on Friday at the time of completing this report stood at around 1.3274 while the median FXStreet Forecast Poll stood at 1.3164. For the next week, the forecasters turned bearish estimating GBP/USD at 1.3229 by the end of next week.

This might as well be affected by the timing of the forecast with the most important uptick on GBP/USD materializing after the US non-farm payroll report afternoon on Friday that has kicked Sterling toward the highs. 

While 33% of forecasters participating at the FXStreet Forecast Poll were bullish last week, the current forecast for the first week of July expects spot rate to fall to 1.3229 from current 1.3274 with bullish versus bearish predictions distributed 40% vs 50% and 10% of sideways predictions. 

This compares to an overly bullish forecast two weeks ago with 69% of forecasters expecting the bullish trend in one week time compared to 65% of participants in the FXStreet Forecast Poll Poll turning GBP/USD bearish three weeks ago. 

As long as longer-term forecasts are concerned, the FXStreet Forecast Poll stood firm expecting GBP/USD to reach 1.3258 in one month time from now compared to 1.3237 last week and compared to 1.3355 two weeks ago. Same stability of predictions is seen in three months time from now, with FXStreet Forecast Poll forecasting GBP/USD at 1.3249 in three months time from now compared to 1.3244 last week and down from 1.3404 predicted two weeks ago. 

FXStreet Forecast Poll