- Difference between the buy (52%) and sell (48%) orders is currently insignificant
- During the last five days the share of shorts increased from 52 to 55%
- Mean of three-month forecasts is at 1.5013
- The upside potential is limited by the 200-hour SMA at 1.4865, while yesterday 1.4760 was responsible for a U-turn.
- Upcoming events: UK Manufacturing PMI, US ADP NFP, ISM Manufacturing PMI, FOMC Member Williams Speech
Amid good UK fundamentals demand for the Sterling was strong yesterday, as evidenced by its performance relative to the other major currencies, and the Pound appreciated against all of them. The largest advancement was versus the Euro (+1.00%), while the weakest rally was versus the US Dollar, only +0.05%, which also benefited from strong data.
UK economic growth for the fourth quarter of 2014 has been revised upwards, helped by stronger than initially estimated consumer spending and foreign trade. According to the final data, Britain's GDP gained 0.6% in three months through December, a positive revision from 0.5% seen in the preliminary projection. Moreover, country's economy surged 3% during October-December time period from a year earlier, up from 2.7% forecasted before. All in all, the economy climbed 2.8% in 2014 and is currently exceeding its pre-crisis peak of 2008 by 3.7%. Among GDP components, the most positive impetus came from household spending which increased 0.6% in Q4, as well as exports which jumped 4.6%, the fastest advance since 2013. Both these indicators were reviewed to the upside, while data for services and manufacturing industries remained unchanged from the preliminary numbers. With imports rising just 1.6%, net trade alone managed to lift UK annual GDP by 0.9% last quarter. Nevertheless, business investment provided a sign of concern as it subtracted 0.9% from Q4 growth.
Meanwhile, UK current account was published worse than projected for a ninth consecutive quarter. In October-December, the deficit narrowed to –25.3 billion pounds, better than downward-revised –27.7 billion pounds in Q3, but worse than –21.2 billion pounds estimated by economists. Despite falling trade deficit, the indicator was offset by a widening shortfall on the secondary income account.
Nicholas Ebisch, Corporate Account Manager at Caxton FX, agrees with Mark Carney's statement before the House of Lords Economic Affairs Committee that "at this point it would be foolish for the BoE to cut interest rates," since it would "add unnecessary volatility to inflation." Ebisch also mentioned that the BoE Governor's use of the word 'foolish' shows that "the MPC is firmly against the interest rate raise at this time."
In light of the recent data, Ian Stewart, chief economist at Deloitte, reckons "the UK has quite good momentum," which largely stems from the exports and the consumer. He also sees "decent recovery" in the investment, and this is likely to result in the UK being "one of the fastest growing economies in Europe." At the same time, Steward does not consider the elections to be a major risk factor for this recovery, though he does acknowledge a likelihood of greater volatility in financial markets in the run-up to the general election.
According to the economist, the general effect of strong economic data out of the UK should be supportive of the Sterling, particularly against the Euro, while concerning the speculations on the UK leaving the European Union, Stewart thinks this is a low-probability event, with the chances that are "well below 50%," since most political parties and a large portion of business and media would likely campaign in favour of continued membership.
UK manufacturing to expand at a higher rate
The first major even for GBP/USD will be the UK manufacturing PMI, which is estimated to increase. This will be followed by a series of releases on the US economy, which are mostly expected to improve and are going to be published between 12:15 and 14:30 GMT, making this period particularly volatile.
GBP/USD keeps moving sideways
Because of a lack of momentum GBP/USD failed to push through support at 1.48, and now the currency pair is headed towards the upper edge of the last week's trading range. The gains should be capped at 1.49, where the weekly PP merges with the 20-day SMA. And while the downside risks still prevail, the technical indicators are mixed, meaning there are unlikely to be any major moves in the short run.
Daily chart
The Cable did not fall along the down-trend to 1.47 as expected. Instead the currency pair turned around near 1.4760 and breached resistance, but at the same time failed to pierce through the 200-hour SMA, showing fragility of an upward impetus. The Pound should thus regain downward momentum and reach 1.47, while a rally above 1.4865 will likely mean a subsequent test of 1.4940.
Hourly chart
Neutral sentiment
Slowly but surely the bears are crowding out the bulls. So far the sentiment is neutral, but during the last five days the share of shorts increased from 52 to 55%.The difference between the buy (52%) and sell (48%) orders is currently insignificant as well.
Sentiment at SAXO and OANDA is also neutral. While the first broker reported 47% of positions being long, a half of the latter broker's clients expect the UK currency to gain value.
Spreads (avg, pip) / Trading volume / Volatility
Still most forecasts between 1.54 and 1.56
FX Community members are mostly bearish with respect to the Cable, as 61.5% of them expect the Sterling to underperform this week. Almost 30% of the survey participants see the currency being worth between 1.4650 and 1.4800 US dollars by the end of Friday, although the second most popular interval, which gathered 25.9% of all votes, is significantly above the spot price: 1.5100-1.4950.
One of the Sterling-bulls, rokasltu, expects that GBP/USD "will finally reach the 1.50 mark." On the other hand, aslamhammad has a different opinion of the pair's prospects, since according to him "the US non-farm payrolls and employment change will be better than expected," which will be bearish for the rate.
Concerning the longer-term forecasts, traders remain bullish towards GBP/USD, but are considerably less optimistic than before. While a month ago three-month consensus was at 1.5367, the current mean of the votes collected between the first days of March and April is at 1.5013. It is worth noticing, however, that the largest portion of the forecasts, namely 16% of them, fell between 1.56 and 1.54. The second place with 13% of votes is tied between 1.50-1.48 and 1.46-1.44.