Pound drops on Data – This week’s theme?

GBPAUD, H1

Sterling saw choppy price action since Thursday, following the UK government’s release of its post-Brexit plans for the Irish border, specially its backstop plan. The backdrop plan caused the drop of Cable by nearly 118 pips after running to a 16-day high at 1.3472. Today however, without much directional bias at the beginning of the London session, pound saw a similar price action against the major currencies. Sterling dropped quite sharply on the big miss of Trade Balance, Industrial and Manufacturing production data. The UK Good Trade deficit widened up to £14 billion in the three months to April 2018. The industrial production released at -0.8% m/m in April from 0.1% m/m expected. The highlight however was the manufacturing output figure, which fell by 1.5% below expectations, and posted a 1.4% Manufacturing Production for April.

These weak figures drove Cable to 67 pips down, to 1.3359. A big drop was also noticed against Aussie, with GBPAUD dropping by 80 pips, down to 50% Fibonacci retracement level set from 1.7390 low posted on June 5. This represents a 50% return on gains from the 5-day rally.

In the 1-hour chart, the pair’s move lower saw a break of the 20 and 50-period SMA, but also a drift from 23.6% to 50% Fibonacci level. Significant though was the close of the hourly candle at the 200-period SMA, which provides a key level for market participants. The 200-period SMA holds at 1.7567 and provides an immediate support for the pair in short-term. Therefore, a rebound from it, could attract buyers, while a break below this level, could suggest the continuation of the down-channel for GBPAUD. In Long-term only a swing higher and a break above Friday’s peak could open the way for 1.7800-1.7900 area.

Technically-wise, the long-term (Daily) but also Short-term (Hourly) momentum indicators remain on the negative momentum scenario. The hourly RSI slopes near 30 barrier, Stochastic just crossed into oversold territory and MACD oscillator increases into the negative area below its signal line, suggesting that momentum is turning from neutral to negative. Next immediate Support holds at 1.7515-1.7500 area (i.e. 1.7515 is the confluence of S2 from PP analysis and 61.8% Fib. level). Immediate Resistance comes at today’s peak price which is also the PP level, at 1.7656.

Nevertheless, despite today’s data, downside risks for Pound are greater than upside risks, as a significant Brexit event looms this week, being the so-called “Super Tuesday“, which will be a 12-hour marathon session in the House of Commons to vote on proposed amendments to the Brexit Bill.

Most likely, although not entirely certain, the government’s position for a “hard” Brexit — to withdraw from the EU’s single market and customs union — will prevail. The opposition Labour Party’s position favours a soft Brexit — remaining within the customs union while prioritizing “full access” to the single market in negotiations with the EU.