GBP/USD: Mixed-bag UK data overshadows rate hike expectations
Fawad Razaqzada October 19, 2017 2:08 PM
This week’s UK economic data were far from impressive but at same time not exactly abysmal either. The mixed-bag domestic data and ongoing Brexit uncertainty has caused the pound to take a hit.
This week’s UK economic data were far from impressive but at same time not exactly abysmal either. The mixed-bag domestic data and ongoing Brexit uncertainty has caused the pound to take a hit. But now that this week’s UK news is out of the way, there is a possibility that sterling could make a comeback on short covering. Still, we don’t expect to see anything significant, especially against the euro. But against the dollar, the pound does have a chance because the greenback has started to head lower again. Even so, the GBP/USD’s potential gains could be capped ahead of next week’s GDP reports from both nations.
The rise of CPI inflation to 3% in the UK was eye-catching but expected. The Bank of England thinks inflation will ease back in the coming months anyway. Nominal wages, including bonuses, rose to 2.2% but this was overshadowed by falling real wages. Today we found out that retail sales were hit last month, falling 0.8%, which basically reversed the growth seen in August. The higher sales figure for August may have been due to tourists taking advantage of the weaker pound which simultaneously discouraged UK residents from going abroad for holiday, meaning they spent what they would have abroad at home. The dismal sales figure for September suggests consumers’ discretionary spending is falling which may be a direct result of falling real wages.
Consequently, the third quarter GDP – which is due for release on Wednesday – may disappoint expectations after its less-than-impressive growth of 0.3% in the second quarter. Still, with inflation being at 3%, the Bank of England looks sets to raise interest rates before the year is out, but this is mostly priced in. So, unless UK data shows improvement in the coming weeks or there’s clarity over Brexit negotiations, the pound may struggle to gain any real ground against her major rivals.
Technically, though, the GBP/USD is still in an uptrend as it resides above the still-rising 200-day moving average and a bullish trend line. But recent price action suggests that at best, the uptrend has weakened. In a clear sign that the bulls are struggling to regain control, the GBP/USD showed very little desire to go higher earlier this morning after the high of yesterday’s hammer candlestick pattern broke. In fact, it turned lower from the next immediate resistance around the 1.3225 area before the disappointing UK retail sales data caused it to crash below yesterday’s low of around 1.3140. Thus, liquidity around both sides of yesterday’s range has already been tested. If the buyers now manage to hold their ground here then we may see a nice push higher during the New York session, while a fresh break below today’s low could send the pound tumbling lower again. The next key support level to watch is around 1.3030 – the low from earlier in the month, where we also have a bullish trend line converging. The next level of resistance is seen at 1.3350, which was formerly support.
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