GBP/USD Expected to Weaken as Drop in PMI Increases Odds of BoE Stimulus

The British Pound finished lower against the U.S. Dollar last week amid economic data that showed a sharp slowdown in the U.K. economy following the Brexit Vote. Additionally, stronger-than-expected U.S. economic data helped drive up the chances of a Federal Reserve interest rate hike later in the year. The GBP/USD closed at 1.3107, down 0.0072 or -0.54%.

New data from Markit showed the U.K. economy likely contracted in July as businesses responded to the uncertainty created by the vote to leave the European Union. According to a survey of purchasing managers at manufacturers and service providers, a cut in output and payrolls signaled a negative response from U.K. businesses. The Purchasing Managers Index fell sharply to its lowest level since 2009. Markit said the measure fell to 47.7 in July from 52.4 in June, the sharpest one-month drop on record.

The drop in the PMI likely increases the odds that the Bank of England will provide fresh stimulus when policymakers next meet in August. This news coupled with increased chances of a Fed rate hike should continue to put pressure on the GBP/USD over the near-term. At this time, the interest rate differential clearly makes the U.S. Dollar a more favorable investment.

Technically, the main trend is down according to the weekly swing chart. Traders have been trying to establish a bottom for two weeks since hitting a multi-year low at 1.2791 the week-ending July 8. A trade through this low will signal a resumption of the downtrend.

The short-term range is 1.2791 to 1.3479. Its retracement zone is 1.3135 to 1.3054. This zone is currently being tested. Trader reaction to this zone will likely determine the near-term direction of the market.

Since the main trend is down, short sellers are going to try to drive the market through this zone in an effort to make 1.3479 a new secondary lower top. However, aggressive counter-trend buyers are going to try to use this zone to produce a potentially bullish secondary higher bottom. Needless to say, the price action inside this retracement zone will tell us if the selling or the buying is greatest at current price levels.

A sustained move over 1.3135 will indicate the presence of buyers. The rally will strengthen if buyers can overcome the uptrending angle at 1.3271. The nearest upside target is a downtrending angle at 1.3416. Buyers would have to take out this angle to convince me that momentum has shifted to the upside.

A sustained move under 1.3054 will signal the presence of sellers. If the selling pressure increases then look for further downside action into a pair of uptrending angles at 1.3031 and 1.2911. The latter is the last major uptrending angle before the main bottom at 1.2791.

This week, look for an upside bias to develop on a sustained move over 1.3135 and a downside bias on a sustained move under 1.3054.