Pound takes another plunge

There wasn’t any significant data scheduled for release in the UK or Europe, but that didn’t stop the already depressed pound to take another pounding this morning.

There wasn’t any significant data scheduled for release in the UK or Europe, but that didn’t stop the already depressed pound to take another pounding this morning. Sterling’s sizeable drop was partly driven by ongoing Brexit and political uncertainties in the UK, which hit a new low after Prime Minister Theresa May’s disastrous speech yesterday. In addition, we’ve had some weaker-than-expected UK data this week from the construction and manufacturing sectors, reducing the odds for a Bank of England rate increase. The selling was exacerbated by technical selling as the GBP/USD broke below 1.3220 support and EUR/GBP simultaneously took out 0.8880 resistance, thus triggering a cluster of stop orders which accelerated the pound’s drop. The GBP/USD was also undermined by a stable Dollar Index, with the greenback finding some footing on the back of mostly positive US data this week, with both the ISM manufacturing and non-manufacturing PMIs, and their employment components, topping expectations. The ADP private sector payrolls report also matched forecasts. Consequently, investors may be thinking that the impact of hurricanes on employment was probably not be as bad as feared last month. Thus they may be positioning themselves for a positive NFP surprise on Friday.

GBP/JPY hovers dangerously above key support level

Among the pound crosses, the GBP/JPY looks the most interesting one to me as it hovers dangerously above a key level circa 148.30. As can be seen from the chart, this level marks the point of origin of the breakout after the pound surged higher in response to the BoE turning hawkish a few weeks ago. Once resistance, could this level turn into support? Given the pound’s ongoing weakness across the board, we are not so confident this level will hold, but if it does then we will want to see some bullish confirmation here, ideally in the shape of a hammer or similar daily candlestick pattern here. After all, there are some good technical reasons why it could break lower: for example, the 200-day average is still quite far from where price is trading around. So the scope for a deeper retracement is there. A closing break below 184.30 could potentially pave the way for a return to the next support around 146.60 area, of even lower. If support at or around 148.30 holds firm or is reclaimed after a temporary breakdown then we may see a bounce towards resistance in the 149.06-149.30 area next. Any potential move beyond this area would be bullish. But as things stand price action is looking heavy. 

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