- 45% of all orders are to purchase and 55% are set to sell the Pound against the US Dollar
- Share of shorts fell from 57 to 51%
- Short-term ceiling is at 1.3300/1.3290
- Current target at 1.3220/00
- Traders' forecasts remain stable
- Upcoming events: UK CB Leading Index, FOMC Member Brainard Speech
Britain's trade deficit narrowed slightly less than expected in July, official figures revealed on Friday. According to the UK Office for National Statistics, the country's total trade gap shrank to 4.5 billion pounds in July, compared to the preceding month's upwardly revised gap of 5.6 billion pounds, whereas market analysts expected Britain's trade deficit to narrow to 4.1 billion pounds in the reported month. Exports of goods and services increased 2% to 43.8 billion pounds, while imports dropped 0.5% to 48.3 billion pounds in July. In the meantime, the UK's visible trade deficit shrank to 11.8 billion pounds in the seventh month of the year, following June's upwardly revised gap of 12.9 billion pounds, while economic desks penciled in a fall to 11.7 billion pounds. Although the British Pound dropped markedly following the country's decision to leave the European Union, the ONS stated in its report that it was far too early to assess the Brexit impact on exports that were projected to grow sharply amid the weaker Sterling.
Back in July, the British Pound was 15% lower against other major currencies, compared with the same period last year. The narrowing of Britain's trade deficit offered some hope that the economy will continue to expand in the Q3 of 2016, despite earlier recession fears.
Where the UK economy is headed?
Judging by the calendar, there is unlikely to be any strong volatility today. However, there is still going to be an important release on the state of the UK economy, more precisely on its direction. It should have very limited effect on the exchange rates, but CB Leading Index is to show what to expect from the UK economy in the future, as it is based on a number of leading indicators that tend to have turning points that precede changes in country's overall business activity. As it is now, the market consensus is that the index will fall 0.3%.
From the US side, the most important event will be FOMC Member Brainard Speech, the last Fed governor to speak. Potentially, this could prove to be important, since there is still no clear understanding in the market what to expect from the September 20-21 meeting, and Brainard could clarify position of the FOMC.
GBP/USD heads to 1.32
The Cable keeps retreating after it topped out at 1.3450, and the rate is likely to fall some 70 pips more before we see a recovery back to the upper bound of the channel. At the moment GBP/USD is testing a support trendline at 1.3270, which has been recently broken, but still could prove to be useful. Once the bulls regain control, the first target will be at 1.3320, while a more serious test of the bullish momentum is to happen at circa 1.34, where the monthly R1 coincides with the August high, Bollinger band and weekly R1 level.
Daily chart
A short-term recovery looks less likely in the hourly chart than it does in the daily one. The lower timeframe period suggests the currency pair is facing a significant supply area at 1.3290, where resistance implied by the upper bound of the four-day channel is reinforced by the 200-hour SMA. Accordingly, here we expect a rather fast descent to 1.3220.
Hourly chart
Bulls and bears in equilibrium
There has been a noticeable change in traders' attitude towards the Sterling over the weekend. There are now significantly less short positions than there were on Friday—their share fell from 57 to only 51%, meaning the sentiment is now neutral. As for the orders, 45% of all orders are to purchase and 55% are set to sell the Pound against the US Dollar.
Sentiment is now neutral elsewhere as well. Compared to what we saw before the weekend, the share of bulls at OANDA increased from 46 to 50%. The portion of longs at Saxo Bank went from 47 to 48%.
Spreads (avg, pip) / Trading volume / Volatility
Traders' forecasts remain stable
Traders have not materially changed their view on GBP/USD since the beginning of July, with the average forecast fluctuating slightly in the range between 1.32 and 1.30 dollars. However, the actual percentage of people who voted for this interval is only 5%, and merely 11% of traders voted for the 1.30-1.34 interval, where the currency pair has been trading since the beginning of July. The most popular answer choice was the 1.36-1.38 interval, which was chosen in 15% of cases. At the same time, 43% of traders expect the Cable to be above 1.34 and 47% of traders expect the rate to be below 1.30 in three months.