- The number of orders to purchase the British Pound declined from 65 to 63%
- Long positions take up 51% of the market
- The 100-day SMAs keeps preventing the pair from edging higher
- The bottom target is the cluster around 1.5360
- 63% of traders reckon GBP/USD will be at 1.54 or higher in three months
- Upcoming events today: BoE Official Bank Rate and Inflation Report, Asset Purchase Facility, BoE Governor Carney Speech, US Jobless Claims, US Preliminary Nonfarm Productivity and Unit Labor Costs, FOMC Member Lockhart Speech
On the day before the UK Bank Rate Votes, the Sterling appreciated against most major peers with exception against the Swissie and US Dollar. The largest gains were recorded against the Kiwi (0.83%) and the Euro (0.68%), while the Cable went down 0.23%, due to improvements in the US fundamentals. Furthermore, the Pound remained relatively unchanged against the Swiss Franc, losing only 0.01%.
Service sector activity in the UK expanded at a faster than projected pace in the tenth month of the year, spreading optimism over the state of the economy and supporting the case for an interest rate increase. The seasonally adjusted Markit/CIPS services Purchasing Managers' Index (PMI), a gauge measuring the performance of the services sector that accounts for 78% of the country's total economy, rose for the first time since June 2015 to 54.9 from 53.3 in September, as reported by market research group Markit. The actual figure outperformed market expectations of 54.5. A reading above the threshold of 50.0 implies expansion, while one below 50.0 hints at a contraction in the sector.
In spite of the improvement, the growth rate in October was still the second-weakest since May 2013. New business expansion did not succeed in accelerating from a 29-month low in September. In addition to that, the 12-month activity outlook was the weakest in two-and-a-half years. Input price inflation slowed down for the fourth time in the last five months, while charges levied by service providers climbed up only marginally. Earlier in the week, the UK construction PMI was released at 58.8, completely in line with market forecasts, while Monday's manufacturing PMI surpassed analysts' projections with 55.5 points.
BoE Official Bank Rate is the Cable's main driver
The BoE's interest rate decision and is the most important event concerning the British economy. No changes in the BoE's monetary policy are expected, but governor Carney's speech later today is expected to provide information about a possible interest rate change in the future. From the US, the Jobless Claims is an important event, as it is monitored by the Fed and plays a role in their monetary policy decisions; however, it tends to have a small or no reaction on the USD crosses. Therefore, the Preliminary Nonfarm Productivity and Unit Labor Costs should affect the exchange rate, with both of the events forecasted to improve.
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 at the beginning 2016."
GBP/USD to retake 1.54
Strong US fundamentals pushed the Cable back under the 1.54 level, but the powerful cluster around 1.5360 limited the losses. Although the same group of supports is still preventing the GBP/USD from edging lower today, another portion of US fundamental might push the pair into the middle of the cluster to 1.5360. From a technical point of view, the Sterling should rebound, with the exchange rate returning to the 1.54-1.55 trading range. The 100-day SMA is the immediate resistance and should limit upside volatility.
Daily chart
The British Pound jumped down to the 200-hour SMA for the second day in a row, but this time failed to rebound. However, the bullish momentum might still be regained and help the Cable retake the 1.54 major level. A breach of the 200-hour SMA is likely to cause a slump towards the 1.5250 area, where the up-trend lies.
Hourly chart
Neutral sentiment
Bulls and bears broke out of equilibrium, with long positions taking up 51% of the market today. Meanwhile, the number of orders to purchase the British Pound declined from 65 to 63%.
The distribution between the bulls and bears at OANDA barely changed, as 51% of open positions are short and 49% are long. Meanwhile, the proportion of bears at SAXO Bank decreased today, with the gap between short and long positions only slightly narrower. Bulls now take up 44% of the market, while bears-the remaining 56%.
Spreads (avg, pip) / Trading volume / Volatility
Majority sees GBP/USD above 1.54 in three months
There appears to be no clear view in the market how the Cable is going to perform during the next three months, but 63% of survey participants reckon that GBP/USD will be at 1.54 or higher. Judging by the results of the poll conducted in October, 17% of traders expect the Sterling to cost between 1.58 and 1.60 US dollars in the beginning of February. At the same time, 12% of the estimates are that the UK currency will be worth somewhere either between 1.50 and 1.52, 1.54 and 1.56 or even 1.56 and 1.58 US dollars in three months. The mean forecast for Feb 5 is 1.5527.
Our respondents, in turn, do not believe that pair will decrease and claim that the closing level will persist during the whole week. Nonetheless, 71% of opened positions are positive, while 28% of voters believe the pair will depreciate, hence, we should not exclude a possible movement even lower.
A trader with a bullish outlook towards the Cable, nuonrg, believes that the GBP Bank Rate on Thursday can cause a thrust to the upside if they follow the Fed. "But first I see a break of a 3 tops high last week. 24 August, 17 Sept, 14 Oct. That needs a retest on level 1.53805 before the bulls will step in," he said. Among the bearish traders, Likerty suggests that the Pound battles important technical areas at 1.5450's. In his opinion it could go both ways, but not too far. "Similarly to the EUR/USD – some bearishness before true reversal is what on the table for this week," the trader mentioned.
On the other hand, nuonrg expects bearish development and states that "the four-hour triple top held the pair capped and price dropped lower", adding that he sees "the down channel continuing to shape the pair with bottom around 1.497 level if it overreacts to the downside".