British Pound: USD/GBP (GBP=X) technical outlook bearish ahead of key data
The Pound ceded ground to the Dollar and underperformed all major rivals of late although the charts are flagging more downside potential ahead of jobs and PMI data due out this week, which will be key to the outlook for Sterling.
Sterling closed 0.29% lower against the Dollar for the week on Friday after softening inflation and dire retail sales data encouraged a further waning of the post-election uptrend in the Pound-to-Dollar rate as markets increasingly price-in a January 30 interest rate cut from the Bank of England (BoE).
The exchange rate has failed to retain the upward momentum it had heading into year end and has now carved out a series of lower highs, and lower-lows on the charts since the turn of the year.
This has left Sterling at risk of a continued drift lower in the coming days, although economic data will have the final word on the trajectory of the currency.
Pound Sterling: What to Watch
The Pound was the worst performing major currency last week although it still faces a plethora of risks that have scope to cause volatility in the coming days.
Tuesday marks the release of unemployment and wage growth figures for December, which have been elevated in importance by the dire messages coming from other figures released over the last fortnight.
“Looking ahead, we are fast approaching two big events: The Bank of England decision on interest rates on 30th January preceding the deadline for Brexit the very next day,” says Lee McDarby, managing director of corporate foreign exchange and international payments at Moneycorp. “Sterling continues to be stable, though this could be the calm before the storm. More information on the Bank of England’s decision this coming week could weaken the pound.”
Consensus is looking for the unemployment rate to have held steady at a multi-decade low of 3.8% in December and for wages to have grown by an annualised 3.1%, down from 3.2% in November.
The data is out at 09:30 Tuesday while IHS Markit PMI surveys are due at the same time Friday. Markets are looking for the globally as well as domestically troubled manufacturing sector to have undergone a stabilisation.
The manufacturing PMI is seen rising from 47.5 to 48.8 but remaining below the 50 level that separates industry expansion from contraction. Meanwhile the more important services PMI is seen rising from 50.0 to 51.1 this month.
“A stream of disappointing UK data has confirmed the MPC’s concerns and sharply increased the odds of a January rate cut. Both November UK labour data and January PMIs will be crucial factors to watch next week. A downside surprise or signs that the data is not improving would likely cement market expectations of a cut,” says Chris Turner, head of FX strategy at ING.
Inflation and retail sales data out last week have prompted the market to go further in pricing-in a January 30 interest rate cut from the Bank of England and in the process, undermined appetite for the British currency. Retail sales revealed the economy hasn’t seen any boost from the so-called Black Friday sales promotions, which it typically does, adding to mounting evidence of a final quarter economic contraction.
Inflation of 1.3% is well below the BoE’s target of 2% and growth was just 0.6% in the 12 months to December, leaving it substantially below the economy’s estimated 1.25% inflation-producing rate of expansion. This could mean a rate cut is inevitable although Tuesday’s jobs data, Friday’s PMI surveys and the January 29 Autumn forecast statement could yet persuade the Monetary Policy Committee into leaving Bank Rate unchanged at 0.75% for a few months more while they observe the development of the economy.
Pricing in the overnight-index-swap market had fallen to imply on Friday, a month-end Bank Rate of 0.55%, below the current 0.75% but still a fraction above the next level down of 0.50%. And the implied Bank Rate for December 23, the final interest rate decision of the year, had fallen to 0.40%.
“This suggests that the downside to sterling may be limited. Indeed, disappointing retail sales for December sparked only a muted reaction in the currency on Friday. If anything, the risks are skewed to more pronounced GBP upside (than downside) next week, as a possible rebound in PMIs would reverse expectations of monetary easing. Hence, our asymmetric GBP/USD range with an upside skew for next week (1.2950-1.3200),” says ING’s Turner.
Current market expectations mean there’s upside as well as downside risks to Pound Sterling in the coming weeks because, if the BoE does cut this month then there’s no telling what investors might price-in for later in 2020.
And if the BoE holds rates steady and indicates it might wait a while before cutting, implied levels for subsequent months may rise. However, ING says that in such circumstances, rallies in the Pound would also be limited because markets might still fear a rate cut at a later date.
Overall, the bias in prices is: Sideways.
The projected upper bound is: 1.32.
The projected lower bound is: 1.28.
The projected closing price is: 1.30.
A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 3 white candles and 7 black candles for a net of 4 black candles. During the past 50 bars, there have been 25 white candles and 24 black candles for a net of 1 white candles.
A falling window occurred (where the bottom of the previous shadow is above the top of the current shadow). This usually implies a continuation of a bearish trend.
A spinning top occurred (a spinning top is a candle with a small real body). Spinning tops identify a session in which there is little price action (as defined by the difference between the open and the close). During a rally or near new highs, a spinning top can be a sign that prices are losing momentum and the bulls may be in trouble.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 47.8081. This is not an overbought or oversold reading. The last signal was a sell 11 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 44.91. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 24 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is -102.This is an oversold reading. However, a signal isn’t generated until the indicator crosses above -100. The last signal was a buy 3 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 8 period(s) ago.
Rex Takasugi – TD Profile
FOREX GBP= closed down -0.001 at 1.299. Volume was 97% below average (consolidating) and Bollinger Bands were 30% narrower than normal.
Open High Low Close Volume___
1.300 1.300 1.298 1.299 3,210
Short Term: Neutral
Intermediate Term: Bearish
Long Term: Bullish
Moving Averages: 10-period 50-period 200-period
Close: 1.30 1.30 1.27
Volatility: 5 9 9
Volume: 98,153 96,038 117,015
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
FOREX GBP= gapped down today (bearish) on light volume. Possibility of a Common Gap which usually coincides with a lack of interest in the security. Common Gaps are fairly irrelevent for forecasting purposes. Four types of price gaps exist – Common, Breakaway, Runaway, and Exhaustion. Gaps acts as support/resistance.
FOREX GBP= is currently 2.4% above its 200-period moving average and is in an downward trend. Volatility is extremely low when compared to the average volatility over the last 10 periods. There is a good possibility that there will be an increase in volatility along with sharp price fluctuations in the near future. Our volume indicators reflect volume flowing into and out of GBP= at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bearish on GBP= and have had this outlook for the last 6 periods.
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