GBP/USD: bearish channel plays-out, 10-D SMA at 1.3350 guards breakdown to 1.3204

GBP/USD's Europen recovery has been capped at 1.34 the figure in New York trade, having pierced the descending 21-hr SMA while the price is in a 4hr range between the 100 and 10-4hr SMAs where the wider scale is between the support and resistance of the descending channel on the daily sticks - fundamentally, its a big week for both sterling and the U.S. dollar. 

GBP/USD has morphed into a 100 pip range, capped at 1.3472 when the dollar firmed on Thursday, extending its gains to 1.3354 on Friday and 1.3344 today, so far after a sleepy Asian session. On a week where we await the outcome of domestic jobs and CPI data, the pound is heavy due to outstanding Brexit issues and very disappointing data on Monday. 

A Rate hike in August ?- Not likely

Firstly, April's manufacturing output was much worse than expected, arriving at -1.4% vs +0.3% consensus. This was the biggest drop since October 2012. Then, industrial output arrived -0.8% vs +0.2% consensus; (Construction output +0.5% vs +2.0% consensus). To round it all off, the goods trade deficit was the widest since September 2016: GBP 14.035B vs 11.35B consensus. All in all, makes the market think again about the possibility of a BoE rate hike as soon as August, especially when this summer is bound to be problematic politically for the UK when we look towards outstanding Brexit issues.

Brexit risks

"The focus for sterling over summer to shift back to Brexit politics ahead of a crucial Commons Withdrawal Bill vote (tomorrow) and the 28-29 June EU leaders’ summit," analysts at ING explained:

Theresa May’s predicament can be characterised as an impossible Brexit Trinity – with the Prime Minister trying to achieve three simultaneous objectives: 

• (1) appease Brexiteer MPs within her own party; 
• (2) find a solution that a majority of MPs in the House of Commons would back; and 
• (3) find an outcome that is politically suitable for all EU members to accept.

GBP/USD levels

On a break of 1.3470/80, bulls will have eyes for the 200-D SMA at 1.3594. The convergence of the 200-D SMA and 1.3583/1.3600 tops comes as the upside target while the 1.3708 level at the 50% Fib of 1.3040-1.4377 remains compelling on the wide. To the downside, below the 10-D SMA at 1.3350, 1.3302 guards breakdown towards 1.3204 recent lows and then 1.3040, as the Nov 3 low.