- The number of buy orders slid from 57 to 35%
- Less traders remain confident in the Pound, namely 58%
- 27% of traders believe the British Pound will cost more than 1.60 dollars after a three-month period
- Immediate resistance is at 1.53 (weekly and monthly PPs, and 50 and 200-day SMAs)
- The nearest support lies around 1.53
- Upcoming events today: UK Average Earnings Index, UK Claimant Count Change, UK Unemployment Rate, US Retail and Core Retail Sales, US PPI and Core PPI, US Business Inventories, US Beige Book
The British Pound declined against most major peers on Tuesday, due to poor inflation data. The largest decline was registered against the Swiss Franc (1.16%), followed by a 0.89% and 0.84% loss versus the Yen and the Euro, respectively. However, the Sterling managed to appreciate against the Aussie (0.96%) and the Kiwi (0.51%).
The UK inflation unexpectedly slipped back into negative territory in September for the second time this year, reaching the lowest level on records. According to the Office for National Statistics, consumer price inflation declined to an annual rate of –0.1%, as cheaper fuel and clothing pushed down average prices. Economists, however, had expected costs of living to hold unchanged at zero. The official report showed petrol prices dropped 14% between August and September compared with the same period last year. Food prices also continued to decline by 2.5% over the twelve months through September. The UK annual inflation has stuck in a narrow band of –0.1% to +0.1% since February, boosting consumers' spending power as earnings began to grow more robustly, boding well for economic expansion. In its October outlook, the Bank of England said consumer inflation was predicted to remain below 1% until next spring, longer than was estimated in its August Inflation Report forecasts.
The ONS also released data for August house price inflation, which showed a 5.2% annual increase across the country, unchanged from July.
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 be a story of Dollar strength rather than Sterling weakness.
UK Average Earnings Index, Claimant Count Change and US Core Retail Sales
For the second day a large number of economic news is expected from the UK, with improvements forecasted. Furthermore, the US a number of data from the US is also due today, with most of it forecasted to worsen. From the UK side the most important should be the Claimant Count Change and Average Earnings Index, showing improvements in the UK labor market, which could ultimately stimulate the BoE to hike interest rates. From the US Side, the Core Retail Sales is a monthly data that shows all goods sold by retailers based on a sampling of retail stores of different types and sizes except the automobile sector. The retail sales index is often taken as an indicator of consumer confidence. This report is the "advance" report, which can be revised fairly significantly after the final numbers are calculated.
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 the beginning 2016."
GBP/USD attempts to return to 1.53
A correction occurred yesterday due to deflation in the UK, taking the Cable's exchange rate significantly lower. The pair dropped as low as the 1.52 major level, but some of those losses were eventually recovered. The Sterling should rebound today, although that might not be the case, as a significant amount of economic news could turn the tables around. Yesterday's support cluster is now providing resistance, whereas the 23.60% Fibo and the weekly S1 are now forming a support around 1.5175. Technical studies are unable to confirm any scenario, while fundamentals suggest a rally.
Daily chart
The Cable bounced back from the 1.5380 level yesterday, experiencing a sharp decline towards the 200-hour SMA and ultimately rebounding from the 1.52 major level. The pair has been rising ever since, slowly returning above the 1.53 psychological mark.
Hourly chart
Bulls prevailing over bears
Less traders remain confident in the Pound, namely 58% (previously 61%). Meanwhile, the number of buy orders slid from 57 to 35%.
The sentiment of other market participants also remains bullish. OANDA still has 54% of traders holding long positions. However, 52% of traders at SAXO Group retain a negative outlook towards the Cable for the second day.
Spreads (avg, pip) / Trading volume / Volatility
27% of traders believe the British Pound will cost more than 1.60 dollars after a three-month period
According to the survey, conducted between Sep 14 and Oct 14, the Sterling is expected to cost 1.5494 dollars in three months. The 1.62-1.64 price interval received the largest number of votes, namely 16%, followed in popularity by the 1.50-1.62 and 1.58-1.60 intervals, selected by 13% of the voters. However, the overall majority (51%) believes that the Pound will still rise above the 1.56 major level by January 14.
The members of the Dukascopy Community are expecting the GBP/USD pair to follow the upward trend as well as to close at 1.543 by Friday, October 16.
The gap between the bulls and the bears is not too wide, as only 56% of traders expect the Sterling to outperform the US Dollar, while the remaining 44% remain short the Pound. RahmanSL, one of the Community members, said that "the UK inflation has been steady with expected employment figures. However, the US has suffered from poor export due to strong USD and falling oil prices. The UK Claimant Court Change will show a drop from last figures and, coupled with unchanged Employment Rate and better than last figure Average Earnings." On the other side of the barricade khalidamassi suggests that the GBP/USD rose last week after breaking 1.5200 after days of consolidation below. "The pair seemed slightly bullish but still need clear break and close above 1.5400 to confirm bullish direction towards 1.5600, in other scenario, pair may move in a range between 1.5200 and 1.5400 the next whole week", he mentioned.