GBP/USD Daily Forecast – Sterling Extends Rebound as Services PMI Hits 16-Month High

PMI data this week out of both Europe and the UK has been encouraging this week but today’s services PMI report especially stood out as performance in the sector rose sharply higher in January. The index printed at 53.9 last month against the earlier estimate of 52.9 and a reading of 50.0 in December.

IHS Markit, the reporting agency, attributed the rise to growing confidence as political headwinds have abated following the UK election. With the services industry as a dominant factor in economic growth for the UK, GDP is expected to rise by 0.2% in the first quarter.

The pound to dollar exchange rate found a floor on Tuesday and extended higher following the positive data. However, the pair continues to show a loss for the week after dropping nearly 1.5% on Monday.

US non-manufacturing and services data will be released later in the North American session which stands to spur short-term volatility. As well, the ADP will release jobs data, providing insight on the US labor market ahead of Friday’s NFP report.

Technical Analysis

While the notable improvement in the services sector is positive for Sterling, Monday’s price action paints a different picture.

The sharp fall on Monday served to erase two prior days of gains, resulting in a bearish engulfing candle on a daily chart. It’s important to note that one of those two daily gains was attributed to the Bank of England not reducing rates last week.

The early week price action has set a negative tone for the week and technical traders are likely to focus on levels to position short because of it.

Two levels stand out in the session ahead. The first falls at 1.3082 and more resistance is seen at 1.3109.

GBP/USD rallied above 1.3050 on the back of the positive services data and the level will be important support for the session ahead. A drop below might suggest that bears have retaken control.

Bottom Line

• A notable improvement in the services sector has led to an extension higher in GBP/USD.
• The recovery might be hindered by the technical outlook as Monday’s decline has set a bearish tone.