- The number of sell orders surged from 56 to 61%
- 66% of traders hold long positions
- Immediate resistance is around 1.2250
- The closest support is at 1.2038
- Upcoming events: UK CPI, UK PPI, UK RPI, US CPI and Core CPI, NAHB Housing Market Index
Industrial production in the United States rose less than expected last month, suggesting the economy grew at a moderate annual pace in the Q3. The Federal Reserve revealed on Monday the country's industrial output advanced 0.1% in September, compared to the preceding month's downwardly revised fall of 0.5%, while market analysts anticipated a rebound of 0.3% in the reported period. On an annual basis, industrial production increased 1.8% in the Q3, marking the first quarterly rise since the Q3 of 2015. Manufacturing output as well as mining output rose 0.2% and 0.4% in September, respectively, while utilities output fell 1.0% in the same month.
The industrial sector was badly hurt by the strengthening US Dollar and surging price of oil between June 2014 and December 2015. Also, it was hampered by businesses' efforts to reduce an inventory overhang. However, the recent stabilization of the US Dollar and oil prices suggest a significant rebound in industrial production. In addition, capacity utilization declined to 75.4% during the ninth month of the year, down from last month's 75.5% reading, while economists anticipated a slight increase to 75.6% during the reported period.
Inflation data are the main drivers
Tuesday is rich with inflation data both from the UK and the US. The most important among them are the CPIs. The UK CPI is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchase power of GBP is dragged down by inflation. The CPI is a key indicator to measure inflation and changes in purchasing trends. The "Core" CPI excludes seasonally volatile products, such as food and energy, in order to capture an accurate calculation. As for the US SPI, the definition stands the same, but the purchase power of USD is dragged down by inflation. Another relatively important reading from the UK side is the RPI Input. It is a monthly measurement of the rate of inflation experienced by the UK manufacturers when buying goods and services. It captures changes in the average price of a fixed basket of goods and services purchase by the UK Manufacturers. From the US side an additional even is the NAH Housing Market Index. It presents home sales and expected home buildings in the future indicating housing market trend in the United States. The growth rate of the housing market affects the USD volatility.
GBP/USD trades in murky waters
Monday ended with the Cable edging only 27 pips higher, but with risks still skewed to the downside. The pair remains located under a strong resistance area, represented by the weekly PP and the monthly S3, which together are likely to cause the exchange rate move lower. Even though technical indicators support this scenario, we should not rule out the possibility of an approximately 50-pip rally, thus, another retest of the immediate resistance area. The base case scenario, however, is a drop towards the 1.21 major level, unless fundamental data turns the odds in Sterling's favour, in which case the Pound will have the potential to reclaim 1.23 level.
Daily chart
The descending channel's resistance line was broken on Monday, indicating that more bullish momentum could follow. However, the 200-hour SMA remains a strong resistance, located near the 1.23 major level. The given SMA is required to be pierced in order to confirm the possibility of further bullish developments.
Hourly chart
Traders mostly bullish
Today 66% of traders hold long positions (previously 64%), whereas the number of sell orders surged once again, namely from 56 to 61%.
A similar situation is observed elsewhere. For example, 63% of positions open at OANDA are currently long. This is more than the share of shorts (37%), more than sufficient for the sentiment to be called bullish. Similarly, sentiment at Saxo Bank is also bullish, with 65% of traders being long and 35% being short the Sterling against the US Dollar.
Spreads (avg, pip) / Trading volume / Volatility
Traders expect no major changes
By the end of the next three months traders expect the Cable to be higher than the level where it is now. While the current price is around 1.23, the average forecast for January 18 is 1.2750. Furthermore, the 1.28-1.30 interval is now the most popular one, having 15% of the votes. On the second place in terms of the votes is the 1.32-1.34 (11%) interval, followed by the 1.20-1.22 and the 1.22-1.24 price ranges with 9% of the votes each. Moreover, 65% all survey participants believe the Cable is to fall under 1.30.