- Number of buy orders remains unchanged at 53%
- Market sentiment remains bearish, but at 51%
- 60% of forecasts for Aug 20 are below 1.56
- Main resistance is at 1.5648, the weekly PP
- Nearest support is around 1.55 (weekly S1; trend-line; 20-day SMA)
- Upcoming events today: UK MPC Official Bank Rate Votes, UK MPC Asset Purchase Facility Votes, US Crude Oil Inventories, US FOMC Meeting Minutes
The British currency experienced mixed performance over the day. Gains of 0.54% and 0.23% were detected against the Euro and the Swissie, respectively. However, the Sterling declined the most against the US Dollar (0.89%), following with 0.30% drop versus the Yen, 0.29% versus the Kiwi and the Loonie. Nonetheless, the Pound remained relatively unchanged against the Aussie, adding only 0.08%.
In line with expectations of the Bank of England, the UK consumer inflation turned negative for the first time since 1960 amid the decline in food and energy prices. The annual rate of the British CPI slid to -0.1% in April from a year earlier, according to the Office for National Statistics. Economists, however, had expected the inflation rate to remain at 0.0%. The consumer inflation was affected by the timing of the Easter holiday, with air and sea fares having the biggest downward pressure on the annual rate. Food prices plunged 3% in April from a year earlier, while fuels and lubricants plummeted 12.3%. The core CPI, a less volatile measure as it irons out energy and food prices, dropped sharply and below market expectations to 0.8%, marking the lowest level since 2001.
With inflation below the BoE's 2% target, policy makers are under little pressure to hike the benchmark interest rate from an all-time low 0.5% for now. Governor Mark Carney said that any period of declining prices will be temporary and an expected pickup in inflation at the end of the year, meaning the next move in borrowing costs is likely to be an increase. The Bank of England predicts CPI to reach the target of 2% in the second quarter of 2017, when based on market interest rate expectations. A separate report showed UK house price inflation rose to 9.6% over the year to March, up from 7.4% a month earlier.
Paul Bednarczyk, head of research at 4CAST, is optimistic with respect to the world's largest economy over the coming months, saying that "we should be seeing some better US numbers coming through," which will lead the Cable to 1.54. Meanwhile, the analyst considers that "over the next three months Sterling will perform well on a trade-weighted basis," but GBP/USD is still likely to decline to 1.4850. In the longer-term perspective, Bednarczyk is also bearish, setting his 12-month forecast at 1.42, which will rather be a story of Dollar strength rather than Sterling weakness.
UK Bank Rate and US Meeting Minutes
The BoE is expected to leave the interest rates unchanged, with all the members being unanimous. Therefore, no breakdown of votes means there will be no indication of a rate change in the near future. Also later in the day, the Fed is to make a statement about whether it is going to raise interest rates or leave them unchanged. Most economists expect a hike in September rather than June. The Meeting Minutes could reveal more worries and good weigh on the US Dollar.
Ross Walker, economist at Royal Bank of Scotland Group, shared his view on the short-term forecast for the Cable. He mentioned that GBP/USD has a moderate sell-off and that it could be down to high 1.50 by around the middle of 2015, or even down to 1.40 by the end of the year. Ross also 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 the beginning 2016."
GBP/USD to rebound from 1.55
Yet again the Sterling weakened against the US Dollar due to disappointing fundamental data. A substantial loss of 150 pips took place yesterday, but with volatility stretching out even to the support trend-line of the channel. As the exchange rate reached a powerful support cluster, a rebound is likely to occur today, while technical studies are bolstering the positive outcome. The weekly PP acts as an immediate resistance and should limit the gains.
Daily chart
Although a rebound did not take place, the Sterling still behaved according to the forecast. The 200-hour SMA was breached, forcing the Pound to drop further down towards the support trend-line. The Cable is expected to jump back up from the trend-line, but we should not rule out the possibility of breaking out of the pattern as well.
Hourly chart
SWFX sentiment closes to equilibrium
The distribution between long and short positions edged closer to the equilibrium, with market sentiment still slightly bearish at 51%; whereas the number of buy orders remains unchanged at 53%.
At the same time, OANDA and Saxo Bank traders are more pessimistic with respect to the UK currency, although not as much as yesterday. The first broker reports that only 44% of its clients are long the Pound, while the sentiment among the Saxo traders has 63% of short positions.
Spreads (avg, pip) / Trading volume / Volatility
15% of traders expect the Sterling to cost between 1.48 and 1.50 dollars in three months
The forecasts for GBP/USD in three months keep improving, but are still below the spot price, with 60% of them being below 1.56. The most popular price range is 1.48-1.50, voted for by 15% of respondents. However, the second most popular choice is 1.56-1.58 (12% of answers). The mean forecast for Aug 20 is 1.533.
During the May 18-22 time period the Dukascopy Community members assume this currency pair to grow further, since more than 58% of all votes are bullish. As predicted by traders, the GBP/USD may close around the 1.560 level this Friday.
This week, geula4x, one of the community members, retains his bullish outlook towards the Cable. He assumes that the overall bullish up-trend remains intact and that the area around 1.55 should provide enough support for the pair to rebound, as it capped the price at the end of April. Aslamhammad, on the other hand, expects the Sterling to fall back from 1.58 to 1.56 by the end of the week, although the Cable has already dropped even lower to 1.55 on Tuesday.