The Cable has taken a dive so far during Tuesday’s trading, declining by nearly 100 pips from the daily high (1.6614) to the daily low, 1.6517. This downfall in valuation occurred despite Tuesday morning’s impressive Construction PMI surpassing all expectations. The market forecast for the PMI was 61.5, with the PMI being registered at 64.0. This signified the highest UK construction PMI in seven months, while also demonstrating the 16th consecutive month that the Construction PMI has been recorded above the 50 level separating growth from contraction.
At first glance, the bearish momentum in the GBPUSD was attributed towards the latest YouGov poll showing that the gap between Yes and No for the Scottish referendum has narrowed, but I think there could be more behind today’s decline than meets the eye. For example, the United Kingdom’s consistently impressive fundamental performances have been the major contributing factor behind pressure being placed on the Bank of England (BoE) to raise interest rates, but Governor Carney appeared to hit those demands for six during the latest BoE Inflation Report. In fact, investors taking profit on the GBPUSD today could even be correlated towards an awareness by investors that no matter how impressive the UK’s fundamentals continue to perform, the BoE will continue to leave rates unchanged. Yes, the surprising emergence that two members of the Monetary Policy Committee (MPC) voted for a rate increase last month added a new twist to the long running BoE interest rate game, but there still remains more convincing to be done within the MPC before a rate increase materializes.
With the European Central Bank (ECB) currently looking like it will need to add further stimulus at some point in the near future and Carney’s comments during the BoE Inflation Report that “the level of bank rate would not rise materially due to global economic headwinds” indicating that the BoE will be paying closer attention to the UK’s major trading partner before raising rates, it perhaps provides a reason to expect a further delay for an interest rate hike from the Central Bank.
In regards to the technicals on the Daily timeframe, a downward channel continues to dictate the overall direction of the GBPUSD. The Stochastic Oscillator is also currently pointing sharply downwards, suggesting Tuesday’s bearish pressure is set to continue. In which case, support can be found at today’s low (1.6517) and the 26th March low, 1.6509. A downside break beneath this level would open the gates for the Cable to trade under 1.65.
At present, the next major economic release from the United Kingdom is Wednesday’s Services PMI. This represents an event risk because not only is Services the main UK GDP contributor, but the sector also reportedly employs around 80% of the UK labor force.
However, with the BoE looking almost certain to leave interest rates unchanged this coming Thursday and there being no current indications that Friday’s US NFP will disappoint, it appears any potential bullish gains for the GBPUSD will be contained and limited for the time being.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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