- Sell orders take up 58% of the market
- 68% of traders have a positive outlook towards the Sterling
- Immediate resistance is around 1.2430
- The closest support is around 1.2382
- Upcoming Events: US Average Hourly Earnings, US Non-Farm Payrolls, US Unemployment Rate, US Trade Balance, US Factory Orders
Business activity in the British services sector improved markedly in the last month of 2016, according a private survey published on Thursday. Markit reported that its Purchasing Managers' Index for the country's services sector, which accounts for more than 75% of the UK economy, climbed to 56.2 in December, following the previous month's 55.2 points and surpassing analysts' expectations for 54.8. This was the fastest rate of growth recorded since the middle of 2015. Despite the stronger than expected December reading, companies are likely to raise their prices to offset the post-Brexit drop in the value of the British Pound that fell around 20% against the US Dollar since the EU referendum. According to Markit, the weak Sterling sent food and fuel prices soaring, as well as pushed costs for plastic packaging, IT and wages. Markit also stated that the UK economy probably expanded at an annualized pace of 0.5% in the last quarter of 2016, ignoring the Brexit vote and slightly easing from 0.6% in the previous quarter. However, analysts widely expect UK growth to drop sharply in 2017.
According to the latest projections, UK economic growth is predicted to slow to 1.1% during this year amid higher inflation and investment cuts. Back in August, the Bank of England cut its key interest rate to a record low of 0.25%, signaling further possible cuts.
US Employment data is due
Friday is relatively rich with US fundamentals, such as the Non-Farm Payrolls. They present the number of new jobs created during the previous month, in all non-agricultural business. The monthly changes in payrolls can be extremely volatile, due to its high relation with economic policy decisions made by the Central Bank. The number is also subject to strong reviews in the upcoming months, and those reviews also tend to trigger volatility in the forex board. Generally speaking, a high reading is seen as positive for the USD, while a low reading is seen as negative, although previous months reviews and the unemployment rate are as relevant as the headline figure, and therefore market's reaction depends on the market assets them all. Another important event is the US Unemployment Rate. It is a percentage that surges from dividing the number of unemployed workers by the total civilian labor force. It represents the percentage of people actively seeking employment and willing to work. Usually, as a higher rate is seen in recessionary economies, while on the contrary, a growing economy sees its unemployment rate decreasing. Therefore, a decrease of the figure is seen as positive for the USD, while an increase is seen as negative, although by itself, the number cannot determine the market's move as it depends on the headline reading, the Non-Farm Payrolls. One more event worth paying attention to is the US Trade Balance. It is a balance between exports and imports of total goods and services. A positive value shows trade surplus, while a negative value shows trade deficit. It is an event that generates some volatility for the USD. If a steady demand in exchange for US exports is seen, that would turn into a positive growth in the trade balance, and that should be positive for the USD.
GBP/USD risks sliding back under 1.24
Poor US fundamental data and persistent weakness caused by the FOMC Minutes continued to weigh pressure on the American Dollar, allowing the British Pound to take the upper hand yesterday. As a result, the Cable surged nearly 100 pips, meeting resistance only near the 1.2420 mark. Although slightly weaker, but the same supply area keeps providing strong resistance, which could turn the tide back into the Greenback's favour. Technical indicators support this outlook, but another set of weak fundamentals could still provide the GBP/USD pair with sufficient impetus for another leg up.
Daily chart
The 200-hour SMA provided sufficient support yesterday, causing the Cable to post some gains and reach a new two-week high. In case bears take over the market – the 200-hour SMA is expected to provide support again, preventing further downside movement. From the technical point of view, the Pound is to edge higher.
Hourly chart
Traders mostly bullish
There are 68% of traders with a positive outlook towards the Sterling today, compared to 61% yesterday. Sell orders keep rising, now taking up 58% of the market (previously 53%).
A similar situation is observed elsewhere. For example, 65% of positions open at OANDA are currently long. This is more than the share of shorts (35%), more than sufficient for the sentiment to be called bullish. Similarly, sentiment at Saxo Bank is also bullish, with 62% of traders being long and 38% being short the Sterling against the US Dollar.
Spreads (avg, pip) / Trading volume / Volatility
Traders expect the Cable to keep falling
By the end of the next three months traders expect the Cable to fall under the 1.24 major level, as 63% of survey participants believe so. While the current price is around 1.23, the average forecast for April 06 is 1.23. However, the 1.18-1.20 interval is now the most popular one, having 17% of the votes, while on the second place is the 1.20-1.22 price range, with 15% of poll participants choosing it. Furthermore, the 1.22-1.24 interval was chosen by 13% of the voters.