- SWFX sentiment remains neutral
- The share of buy orders plunged from 70 to 44%
- 18% of traders assume the British Pound will cost between 1.58 and 1.60 dollars in three months
- 1.55 is the major resistance
- Near-term target is the Oct 13 low at 1.52
- Upcoming events today: UK BBA Mortgage Approvals (Sep), CBI Industrial Order Expectations (Oct), US New Home Sales (Sep)
Performance of the British Pound on Friday was mixed. The currency managed to gain against the Euro (+0.30%), but at the same time the Sterling gave up 0.65 and 0.52% of its value in terms of the Australian and US dollars respectively.
While a hike of the UK's ultra-low interest rates is not certain, households should be ready for higher borrowing costs, Bank of England Governor Mark Carney said. Around 4% of mortgage holders remain vulnerable to higher interest rates as they pay out more than 40% of their household income to service their debts. However, given tightening of the labour market and wage growth, which was uneven across the economy, interest rates would increase gradually and slowly rather than decrease, after staying at all-time low since March 2009. According to the recent BoE report, the number of mortgage approvals rose the most since January 2014 to 71,030 in August, compared with an upwardly revised 69,010 a month before. Meanwhile, net lending for house purchases increased by 3.4 billion pounds, the highest level since May 2008. This compares to 26,700 approved during the 2008 financial crisis peak in November 2008, and a surge to 135,200 approved before the financial downturn in November 2003.
Carney has previously said that a decision about the timing of a rate hike would become clearer around the turn of the year. Investors do not expect a first BoE move until late 2016 or early 2017 amid China's economic slowdown, Britain's near-zero inflation rate and the Fed's cautious approach about raising rates.
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 mortgage approvals and order expectations to decline
According to the expectations, UK economic indicators are likely to weaken. However, this may not put the Sterling under immediate selling pressure, being that according to the forecasts the US new homes sales are also expected to fall: from 552K for August to 546K for the previous month.
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 denied by 1.55
Resistance at 1.55, created by the monthly R1 and 100-day SMA, proved to be a major level after the last two weeks of trading. A sell-off from there has already extended beyond the 200-day SMA, and most of the long-term technical indicators keep pointing south. Today we expect to see a lot of pressure on the monthly PP that in turn will be defending September's low. A breach of 1.53 will highly likely result in a re-test of the 1.51, which is the lowest level since this year's May.
Daily chart
In the hourly chart the Cable has fallen through the long-term moving average. This is an additional bearish signal, which implies a sell-off down to the October 13 low at 1.52. Meanwhile, we dislike the fact that the currency pair is not following any trend-lines at the moment, which deprives us of the possibility to estimate in what manner the expected sell-off will unfold.
Hourly chart
Neither bulls not bears have the upper hand
Although the percentage of bulls increased, the sentiment remains neutral, as the gap is merely 6 percentage points. Meanwhile, the share of buy orders plunged from 70 to 44%.
The sentiment is neutral elsewhere as well. Among the OANDA clients 52% are holding long positions at the moment. SAXO Bank traders are undecided as well: 47% of positions are long and 53% are short. However, this was not the case before the weekend, when 64% of SAXO Group traders were short the Sterling.
Spreads (avg, pip) / Trading volume / Volatility
18% of traders assume the British Pound will cost between 1.58 and 1.60 dollars in three months
According to the survey, conducted between Sep 23 and Oct 23, the Sterling is expected to cost 1.5507 dollars in three months. The 1.58-1.60 price interval received the largest number of votes, namely 18%, followed in popularity by two other intervals: 13% of voters believe the Pound will be either in the 1.62-1.64 interval or it will cost less than 1.46 dollars after three months. Nonetheless, the exactly half of the voters (50%) believes that the Pound will fall below the 1.56 major level by January 23.