GBP/USD: Cable soared on plunge in USD

  • GBP surged on broad USD weakness.
  • Market is concerned about Brexit effects on UK economic growth.

GBP/USD is now trading around 1.4002, in late New York session,  with the pair soaring by over 0.80% and hovering around  its daily high on a plunge in the greenback   amid muted retail sales and subsequent series of GDP downgrade for the US.

Although US CPI came upbeat today, retail sales came subdued. As a result, Atlanta Fed and several other institutions have lowered their Q1 US GDP´s  projections on weak consumer spending or private consumption and the USD  was doomed across the board. Higher US bond yields after upbeat CPI today may be also a big headwind for USD on risk aversion as it bound to affect the stock market eventually.

Earlier at EU session, GBP/USD was under pressure and edged down by almost 0.15% on IMF’s concern of Brexit uncertainty´s effects on the UK’s economic growth. The IMF estimated the UK GDP at 1.6% for 2018 and CPI at 2.6% by Dec’18, but in the medium-term GDP may slow down to 1.5% under baseline assumption of continued progress in Brexit talks; UK outlook depends crucially on the outcome of negotiations with the EU.

In another report, a BOE agent projected that UK´s activity growth will be steady but at a modest pace. It also noted that UK services firms report a pickup in growth, good exports volumes strengthened, construction output growth had continued to slow, recruitment difficulties had remained at an elevated level and pay growth had picked up; investment intentions remain positive but mainly reflected investment to maintain business activity.

Thus, both IMF & BOE agent reports look quite cautious on UK economic prospects, which  contrasts to an unusually hawkish-hold stance by the central bank (BOE/MPC) last week and subsequently GBP is under pressure as it’s a victim of UK politics rather than economics.

UK reported higher than estimated core CPI yesterday for Jan (2.7% vs est 2.6%; prior: 2.5%), headline CPI was also on the higher side (3% vs est 2.9%; prior: 3%) and well above the BOE´s target level of 2%, but PPI & RPI came muted. Also, the headline CPI is well within BOEs forecast and thus market may have some credibility issue with any BOE rate hike in March.

Although UK’s Hammond (Finance minister/Chancellor) is quite confident that the UK can reach a good deal with the EU, market is not so convinced about prospects of a soft Brexit. UK PM May will meet with Merkel this Friday at Berlin to discuss Brexit with a press briefing afterward.

Technical view:

Price action suggests that for any further rally, GBPUSD must stay above the 1.4077 zone; otherwise it will come down again sustaining below 1.4034.

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