- The portion of orders to buy the Sterling edged up from 58 to 69%
- 64% of traders hold long positions
- Immediate resistance is represented by the weekly S1 at 1.4668
- The cluster around 2015 low is the nearest support
- 58% of traders reckon GBP/USD will be at 1.50 or lower in three months
- Upcoming events: UK Trade Balance, US Average Hourly Earnings, US Non-Farm Payrolls, US Unemployment Rate
The British currency struggles to post gains against commodity currencies yesterday, with exception against the Aussie. The Pound added 0.08% versus the Kiwi and 0.19% versus the Loonie, while gaining 0.78% against the Australian Dollar. Losses of 1.51% and 1.46% were registered against the Swiss Franc and the Euro, respectively, followed by a 0.76% decline against the Yen. The Cable, however, edged only 0.08% lower over the day.
Confidence among British services companies dropped to the lowest level in three years in December as the risk of Brexit impacted executives' mood. Markit's headline activity index declined to 55.5 last month from 55.9 in November, but remained above the long-run survey trend level of 55.2. The services sector accounts for roughly 80% of the UK economy. A strong measure of new business was offset by the weakest pace of job creation in the sector since July, while long-term expectations for business activity were the lowest since 2013.
In addition to that Markit lowered its fourth quarter GDP estimate to 0.5% from 0.6% a month ago. The biggest downside contributors to the UK economy growth in 2015 were manufacturers and exporters. A strong Sterling meant UK exports became less attractive on the global arena. Significant downside risks remain in the British economy in 2016, including government spending cuts, a potential increase in interest rates, as well as the cost impact of the living wage. The Bank of England is predicted to hike interest rates in the second quarter of 2016. However, given inflation remains stubbornly low and earnings growth has been sluggish, financial markets see the central bank raising rates around the end of the year as a realistic scenario.
UK Trade Balance and US Non-Farm Payrolls
Concerning the UK economy, the most important economic data release today is the UK Trade Balance. The Trade Balance is released by the National Statistics, it is a balance between exports and imports of goods. A positive value shows trade surplus, while a negative value shows trade deficit. It is an event that generates some volatility for the GBP. If a steady demand in exchange for UK exports is seen, that would turn into a positive growth in the trade balance, and that should be positive for the GBP. According to the forecast, the gap between the exports and imports is to narrow, having a positive effect on the Sterling.
Furthermore, the US labour market data is due later today. No changes in the Unemployment Rate and the Average Hourly earnings are expected, whereas the number of people on the payrolls of all non-agricultural business is forecasted to fall. However, we the result might exceed expectations to the upside, as the ADP data suggested on Wednesday.
Ross Walker, economist at Royal Bank of Scotland Group, suspects that GBP/USD may descend to 1.50 by around the middle of 2015, or even down to 1.40 by the end of the year. Ross mentioned that "the main driver in many ways, as well as the main support in recent times, have been the expectations that the Bank of England will raise interest rates at some point next year, probably at the beginning 2016."
GBP/USD muted ahead of Payrolls data
The British currency was able to almost completely recover from its daily low yesterday, posting just a 12-pip loss over the day. Even though the 2015 low was only retested, a strong reading of the US Payrolls data today might cause the GBP/USD to drop to a fresh five-year low. Furthermore, a breach of the immediate support cluster is likely to prolong the Cable's bearish trend until the pair falls to 1.4235—the 2010 low. Contrariwise, a disappointment in the labour market figures could trigger an anticipated rebound, with the nearest resistance in face of the weekly S1 unable to hold the gains.
Daily chart
The Cable was able to rebound from the trend-line and the 2015 low, despite volatility edging even lower. The bullish momentum appears to have been regained, whereas the 200-hour SMA is to provide resistance in case the GBP/USD receives a boost from the fundamental data today.
Hourly chart
Bulls remain strong
Bullish traders' sentiment remains unchanged at 64%, while the portion of orders to buy the Sterling edged up from 58 to 69%.
SAXO Group and OANDA have different perspectives towards the GBP/USD. Among SAXO Group traders, sentiment worsened, as 53% of their positions are now short (previously 51); whereas 66% of OANDA traders have a positive outlook towards the Cable, compared to 64% on Thursday.
Spreads (avg, pip) / Trading volume / Volatility
Majority sees GBP/USD below 1.50 in three months
The majority of votes is still on the bearish side, as most of the survey participants (58%) believe the GBP/USD is going to cost 1.50 or less US dollars in three months. According to the survey, the most popular choice was the one implying that the Sterling will cost between 1.42 and 1.44 dollars in three months, believed by 32% of the voters. Meanwhile, the second most popular choice is divided between three intervals, namely 1.46-1.48, 1.50-1.52 and 1.54-1.56, all three voted for by 12% of the surveyed. At the same time, the mean forecast for Apr 09 is 1.4897.
Concerning the present week, sentiment experienced some changes, but the vast majority of all votes are still negative on the GBP/USD currency pair, namely 71% of them. The average prediction for Friday of this week is located around the 1.480 major level.
Maratamus, a member of the Dukascopy Community, believes the Sterling is to outperform the US currency. "To my mind, the Pound is totally oversold, thus I am going to buy hard," he commented.
Meanwhile, another trader under the nickname jz21 suggests the Cable is to weaken, as he said that it is likely the Sterling will come under strong selling pressure during the first week of January 2016."