GBP/USD Daily Forecast – Sterling Drops as Construction Output Tumbles

GBP/USD showed some underlying strength yesterday as the pair managed to stave off losses despite weak economic data and a stronger dollar. However, Sterling bulls seem to have thrown in the towel today with the pair dropping firmly below the 1.2400 handle.

IHS Markit released its purchasing managers index for the UK services industry yesterday and for the construction industry today. Both showed a sharp deterioration in activity although the former fared a bit better.

The construction PMI tumbled to a record low of 8.2 with 86% of those surveyed saying they saw a decline in business activity. House building and commercial work were hit the hardest as building sites were shut down last month.

The industry is expected to bounce back as lockdown measures ease although supply chain disruptions will likely continue to weigh.

PMI data from the US yesterday also showed a notable contraction although the ISM non-manufacturing PMI came in ahead of analysts’ expectations with the index declining to 41.8 rather than the analyst forecast of 37.5.

The ADP will release employment data later in the day which is expected to show just over 20 million jobs lost last month, in line with what the weekly jobless claims report has signaled.

Technical Analysis

GBP/USD was last seen testing support at 1.2369 which could trigger a bounce. However, where the pair closes at the end of the day will be important as the 20-day moving average is in play.

The moving average served to hold the exchange rate higher yesterday and a clear downside break stands to put further pressure on the pair over the near-term.

From a broader perspective, GBP/USD has been trading in a range since the end of March and recent price action has not altered this outlook.

Resistance for the session ahead is seen at 1.2415 while it would likely take a break above 1.2476 to once again encourage bulls.

Bottom Line

• GBP/USD has broken lower after trading in a tight range yesterday, and is on pace to close below its 20-day moving average.
• Construction PMI figures from the UK declined to record lows as the industry came to a halt last month as a result of lockdown measures.