GBP/USD extends decline on soft UK data

It hasn’t been a good week for the pound so far. Ongoing uncertainty over Brexit negotiations and weak economic data have overshadowed the recent hawkish talk from the Bank of England.

It hasn’t been a good week for the pound so far. Ongoing uncertainty over Brexit negotiations and weak economic data have overshadowed the recent hawkish talk from the Bank of England. After yesterday’s weaker-than-expected manufacturing PMI print, activity at the construction sector unexpected fell in September for the first time in 13 months, as the PMI came in below boom/bust level of 50, printing 48.1 vs. 51.1 expected. Separate data from the ONS showed that British households are suffering the longest period of falling real disposable incomes in nearly six years. Real household disposable income per person fell 1.1% in the second quarter compared to a year-ago period. This was the fourth consecutive quarterly decline. But had it not been for the higher inflation, the data would have looked completely different as wages grew in nominal terms, boosting nominal incomes.

As a result of disappointing data, most of the pound’s BoE-inspired gains have evaporated. Still, the fundamental outlook does remain supportive for the pound in the medium term outlook as most of the bad news is already priced in, and now with rising inflation, the Bank of England looks set to raise interest rates, possibly as early as November. Sterling has also been undermined by the rising levels of stock prices in the UK, owing to improving sentiment towards risk globally. The pound and the FTSE have a tendency to go in the opposite direction, although it is mainly the pound that moves the FTSE rather than the other way around. This is because a large proportion of profits for FTSE 100 companies is made in foreign currencies. So, if the pound weakens then revenues in foreign currencies, once converted back into sterling, are worth more, and vice versa. But given the nature of these algo-driven, intercorrelated, markets, even movements in the FTSE tend to impact the pound.

As far as the GBP/USD is concerned, the next fundamental drivers for this pair will be this week’s release of key services sector PMI data from both the UK and US (Wednesday), and the US non-farm payrolls report (Friday). Ahead of these macro events, the cable is now down for the third consecutive weeks. At around 1.3230, it was bang in the middle of a key support area between 1.3223 and 1.3263, at the time of this writing. As can be seen on the weekly chart, this area was formerly resistance, so it could turn into support. Any potential break below this area could possibly expose the 1.30 handle for a re-test. Resistance comes in at 1.3345 – last week’s low. Any move back above that level would be deemed bullish in the short-term outlook. Longer-term resistance levels come in at 1.3505 (already tested; 2009 low), followed by 1.3840 and then at 1.4015 – these being the lows prior to the Brexit vote. 

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