Pound ignores the negative indicators – for how long?

GBP/USD enjoyed the initial weakness of the US dollar to rally and stalled at a high level of resistance, 1.3615. And as the dollar recovered, cable retreated but never went too low. 

There are reasons for the pound to go lower, but it currently ignores them. Will Sterling fall with a delay? Or was it too undervalued to begin with?

Here are a few negative signs:

  • House prices are falling: The Halifax HPI disappointed with a drop of 0.6% against a rise of 0.2% expected. In addition, the news came on top of a downward revision.
  • Spending is lower: According to Visa, consumer spending is down 1% y/y in December after -0.0% in November. 2017 was the first time in 5 years that consumption dropped. In real terms, the slide was 0.3%.
  • Forward-looking PMIs were not great: The manufacturing, construction, and services PMIs either met low expectations or fell short of them. These indicate slower future growth.

And what about the bigger picture of Brexit?

A trade deal is not coming anytime soon: Sure, Theresa May’s government looks more stable, but is that a good thing? The EU continues getting the upper hand and May is heading for a hard Brexit. Adopting a Norway-style deal does not seem to be a remote option and crashing out of the single market or crashing out of the EU seems like a good option in general.

All in all, GBP/USD is hugging the former resistance line of 1.3550 and is still looking for a direction. If it depends on the data, the direction should be down.

What do you think?


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