GBP/USD broke the winning streak of 6 weeks and closed lower in an exciting week. The BOE’s all-important rate decision and inflation report stands out. Will cable crumble? Here are the key events and an updated technical analysis for GBP/USD.
BOE Governor Mark Carney was grilled on Brexit forecasts but kept the monetary cards close to the chest. Manufacturing and construction PMIs came out below expectations and did not help the pound. In the US, a significant rise in wages came on top of a slightly hawkish Fed decision and helped the greenback in its comeback attempts.
GBP/USD daily graph with resistance and support lines on it. Click to enlarge:
Services PMI: Monday, 9:30. The services sector is the most important one in the UK and the publication of Markit’s services OMI always moves the markets. The sector has been experiencing OK growth according to Markit: a score of 54.2 in December. The first release for 2018 is expected to be very similar: 54.1 points.
BRC Retail Sales Monitor: Tuesday, 00:01. The British Retail Consortium’s measure of retail sales rose by 0.6% y/y in December, for the second time in a row. We will now get the figures for January, which may be worse.
Halifax HPI: Wednesday, 8:30. This is not the earliest house price index measure, but is highly regarded and tends to move the pound. The most recent report for December was a very big disappointment: a drop of 0.6% in prices, far worse than 0.2% exepcted. A small correction is forecast for January: an increase of 0.3%. There are growing concerns about the housing market.
RICS House Price Balance: Thursday, 00:01. The Royal Institution of Chartered Surveyors has shown a positively surprising rise in the balance between prices rises and falls, a level of 8% in January. A slide to 5% is on the cards.
BOE rate decision and QIR: Thursday, 12:00. The Bank of England is expected to leave the interest rate unchanged at 0.50% after hiking it to this level in November. However, they will certainly move the market. In addition to the decision and the meeting minutes, the BOE will also publish the Quarterly Inflation Report, which contains a wider assessment of the economy and the path of inflation. This “Super Thursday” becomes even more “super” with the publication of the Inflation Letter. Governor Mark Carney is obliged to send an open letter to the Chancellor of the Exchequer Phillip Hammond and explain why inflation breached the 1-3% range. This happened for a short time and inflation is expected to fall. Nevertheless, the abundance of documents that the BOE releases should supply a lot of material to move markets. The initial response will likely come from the voting pattern. Any deviation from a unanimous vote to leave rates unchanged will stir the pound. Afterwards, the assessment of the economy and more importantly, inflation, will have its say.
Manufacturing Output: Friday, 9:30. Manufacturing production rose once again in November, by 0.4%. The weaker pound helped this sector’s exports. A more moderate increase of 0.3% is on the cards for December. The wider industrial output measure carries expectations for a drop of 0.9% after rising by 0.4% beforehand.
Trade balance: Friday, 9:30. Britain has a trade deficit that has widened since the EU Referendum. A deficit of 12.2 billion pounds was recorded in November and a narrower 11.5 billion is predicted now.
Construction Output: Friday, 9:30. The construction sector saw output rising by 0.4% in November and a small slide of 0.1% is predicted now.
NIESR GDP Estimate: Friday, 13:00. The National Institute of Economic and Social Research provides a GDP measure of the last three months. For the three months ending in December, the full fourth quarter, NIESR showed an increase of 0.6%, better than the first estimate of GDP that came out at 0.5%. We will now get the estimate for the three months ending in January.
Jon Cunliffe talks: Friday, 16:45. The BOE Deputy Governor talks in California and may provide some late market movements for the pound, a follow-up on the BOE.
BP/USD Technical Analysis
Pound/dollar was unable to reach new highs and at one point dipped towards the 1.3945 level (mentioned last week). High volatility sent the pair up and down, eventually closing at 1.4120, lower than last week.
Technical lines from top to bottom:
1.4745 capped the pair ahead of the Brexit referendum in 2016 is our high point. Further below, we find 1.4665 which capped the pair early in that year. 1.4520 is also a resistance line from that period.
1.4345 is the January 2018 swing high that is worth watching. The round number of 1.41 held the pair up after falling from that level. In the middle, we can point out to the veteran line of 1.4240, but volatility is somewhat wild here.
1.3980 was the swing low in late January 2018. 1.3830 served as support after the break of the financial crisis.
1.3743 was a peak early in January and should be watched. The previous cycle high of 1.3620 serves as strong resistance.
1.3550 was the November peak. 1.3460 capped the pair in mid-December and serves as resistance.
Here is the bigger picture of GBP/USD, using the weekly chart:
I remain bearish on GBP/USD
The Bank of England got its rise in the exchange rate that softens worries about rising inflation. Together with fraught Brexit negotiations and an internal strife, the pound could see another week of losses. In the US, the excellent jobs report is not fully priced in.
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