GBP looks to be starting its next leg down
With the Bank of England pushing the pedal to the metal on monetary stimulus and the likelihood of data pointing to a deteriorating UK economy – there’s little to stop GBP/USD sinking further into negative territory.
GBP/USD could now be on course to hit levels of 1.2700 and even 1.2500.
The Bank of England cut interest rates to 0.25% from .0.5%, restarted its quantitative easing programme with a target to buy £60bn of gilts and £10bn of corporate bonds and launched a term funding scheme to make sure rate cuts are passed to households and businesses.
And the BoE has made it clear that it is prepared to do more if the economy falters. It could for instance cut interest rates further to 0.0% or 0.1% and step up its quantitative easing programme.
Against the backdrop of an alarmingly massive 7% current account deficit and with Brexit likely to deter many foreign investors, there’s really not much to support GBP in the short to medium term.
This week should reveal more clues about the true state of the economy with some hard data following the Brexit vote and some very negative sentiment readings in recent weeks.
Tuesday sees the release of consumer and producer inflation, which should show rising prices following GBP’s heavy falls. Wednesday sees the release of unemployment data, which is expected to show signs of rising joblessness (and on the other side of the Atlantic the US releases FOMC minutes). Thursday sees more retail sales data where market participants expect little growth.
However, July retail sales showed a reassuring 1.1% rise on the month before – suggesting shoppers weren’t as shell shocked by the referendum result as many commentators thought they would be.
And there are some early signs that a weaker pound might be having some positive benefits for the economy. There’s a mini-tourist boom going on and a number of UK companies are revising up their profit numbers thanks to a much weaker sterling making their foreign currency earnings more valuable when repatriated home.
But in the meantime, the markets are going to be more focussed on the negative aspects and will pick up on any poor economic numbers as an excuse to sell GBP/USD, partly on the basis that it raises the prospect of yet more stimulus from the BoE. It’s quite possible that even if some of this week’s data surprises on the upside – gains are likely to be limited and temporary as markets recoil at the years of uncertainty for the UK’s global trading relationships.
TECHNICAL ANALYSIS: GBP/USD – little support to be seen
With the UK potentially facing a significant economic slowdown and with the Bank of England on standby to provide ever greater monetary stimulus – there seems to be little stopping GBP/USD from notching up further losses in the months ahead.
Indeed, last week’s losses resumed following a short period of respite from the big drop after the Brexit vote. Support around the 1.3000-3100 level has been brushed away with the pair hitting lows of 1.2909 on Friday.
GBP/USD looks set to test the previous post-Brexit vote low of 1.2798 following a test of support at 1.2850. Beyond that levels such as 1.2750, 1.2700, 1.2625 and eventually even 1.2500 beckon.
However, should there be some positive catalysts for GBP/USD, such as stronger than expected economic numbers – resistance is likely to be encountered at 1.3010 and 1.3109.
In the meantime, the sell signal on the slow stochs looks close to playing out and the RSI is approaching negative territory. Also, the dailies are drifting ever further from the 50-day moving average. What this suggests is that another pause in the downside action probably isn’t far off – maybe latter this week or next – and will be an opportunity for short-sellers to position themselves for more downside moves on GBP/USD.
By Justin Pugsley, Markets Analyst, MahiFX