GBP/USD: Go long or go short?
City Index August 20, 2014 9:43 PM
<p>GBP/USD is set to post its second monthly consecutive decline, the longest long streak since Jan-Feb 2013. Slowing wage growth has played a major role […]</p>
GBP/USD is set to post its second monthly consecutive decline, the longest long streak since Jan-Feb 2013. Slowing wage growth has played a major role in revising down interest rate hike expectations by countering the positive impact of falling unemployment and improved growth. But UK fundamentals remain robust, even by G5 nation standards. Here is a run-down of the important negative and positives to GBP/USD in the first of our #longorshort series.
The case for going short
- UK Q2 earnings posted their first contraction in four years. Earnings minus inflation are at -1.0%, highlighting the case of real negative earnings to the man-in-the-street.
- CPI slowed to 1.6% y/y in July, further dropping below the Bank of England’s 2.0% target and reducing need of any immediate tightening.
- Falling oil prices & robust GBP weighs on producer prices may further dampen producer and retail inflation and encourage BoE to see further declines in unemployment.
- Scotland’s independence referendum on Sep 18 is widely expected to result into a “No” but the mere possibility of a “Yes” vote, or a smaller than expected victory for the “No” camp may be sufficient to maintain GBP under pressure due to implications for further Scottish devolution and uncertainty into next year’s general elections.
The case for going long
- Sixth consecutive monthly decrease in the ILO unemployment rate to fresh six-year lows of 6.4% highlights the uninterrupted tightening in UK labour markets.
- GDP regained all of its post-crisis decline.
- UK services PMI remains higher than that in US, Eurozone, Germany and China.
- Two dissenting BoE members calling for an immediate rate hike versus the other seven members could well grow into a more meaningful third member before year-end, which may support GBP.
- GBP bulls await the upward revisions to UK GDP from the ONS as a result of new methodology including R&D costs and black market activities. These are said to add 1.6% to GDP.
- Technically, GBP/USD remains supported by a key confluence of the 200 day and 200 month moving averages.
It would take a major fundamental deterioration for the pair to breakdown below this level.
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