GBP/USD continues to drop, and about time too!

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 2, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Guatemala) - GBP/USD is taking a large amount of supply as we head towards the key Nonfarm Payrolls outcome this week and a big test in sterling comes with EUR/GBP testing a triple top while cable tests March/April ranges below 1.4950 and seven-month lows without much in the way of technical support until April lows atr 1.4566. However, stops were triggered and leaves cable in oversold territory in a market already heavily long-dollars.

    Fundamentally, the ADP report was very positive and Fed's Lockhart countered a dovish Brainard yesterday who would welcome more time in light of the damage a strong US dollar is doing and wants to see strong job market. Lockhart on the other hand welcomes lift off in Dec so long as data continues to look good up to FOMC meeting.

    GBP due for a worthwhile correction

    Meanwhile, the UK hasn't offered anything in the way of fundamentals since the construction PMI slowed sharply in November from 58.8 to 55.2, a terrible number although analysts at BBH explained, "The UK government pushing home construction as a major policy initiative, we should see this sector well-supported through the coming years, and wouldn't worry too much." Earlier in the week, the manufacturing PMI's were poor as well at 52.7 vs 53.6 expected and way below 55.2 previous. This may not be a bad thing for the UK longer term, as a rebalancing of the exchange rate could be consider necessary.

    The recent drop in the PMIs could be due to the previous strength in the pound, with an effective rise of around 7.5% since the start of 2015, while both manufacturers and exporters have been vocal expressing their concerns while the value of the euro in the EZ, the UK's largest trading partner, has continued to plummet.

    BoE to delay rate hike until mid 2016?

    Therefore, it would be prudent that the BoE remain mindful of this and delay timings of a rate hike as a means to manage the cross rate in favour of the manufacturing and export sector, leaving Q1 2016 rate hike out of the question and exposing the pound to some overdue supply. there is already tightening in the economy reflected through inflation and data via the exchange rate.

    Moreover, "In a testimony earlier this week, Carney remarked that the Bank may be prepared to hike banks' capital requirement to rein in lending if necessary. This could be used as an alternative to an interest rate hike and would have the potential advantage of having less impact on the pound," - explained analysts at Rabobank.

    GBP/USD levels

    Technically, on a pull back, rallies should find resistance at 1.5092 (1hr 200 SMA ). Karen Jones, chief analyst at Commerzbank explained that the 200 day ma at 1.5328 is main resistance and while capped here cable will remain under pressure. "Failure here will target initially the 1.4860/78.6% retracement of the move up from April. This is regarded as the last defence for the 1.4577 April low."
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