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Jignesh Davda
GBP/USD

UK GDP Grows By 0.3% in Third Quarter

A report from the UK Office for National Statistics showed 0.3% growth last quarter which was a tick lower than the analyst estimate. The release further revealed that while GDP was steady in Q3, growth over the last year has slowed to a decade low.

The Bank of England expressed some concerns over the economy when it met last week. Two BoE members voted for a rate cut at the meeting which took the markets by surprise. GBP/USD reacted lower as a result of it but the decline on the back of the meeting stalled out on an approach to the 1.2800 level.

The BoE expressed some concerns over business investments which have declined about 1% since the Brexit vote. While there is some optimism that the worst-case scenario, a no-deal Brexit, is no longer a likely outcome, there remain concerns that a further delay will impact businesses adversely.

The dollar bounced back last week which also weighed on GBP/USD. The US Dollar index (DXY) found buyers after testing it’s 50-week moving average and has rallied to erase half of the drop from the decline that began at the start of October.

The appetite for risk has softened to start the new week. Most equity indices around the globe are paring losses ahead of the US Open. Bonds and precious metals are recovering, keeping a bit of pressure on the dollar.

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Technical Analysis

It’s worth keeping an eye on the dollar index as it posted gains every day of the week last week. DXY has rallied above a major horizontal level at 98.25 but has since retreated and was last seen testing the level. This is a level that held it lower three times between April and May.

GBPUSD 4-Hour Chart

GBP/USD lost momentum from its prior rally in late October and has mostly been ranging since. The pair posted a succession of lower highs and lower lows after declining below the 1.2800 handle last week.

However, there does not appear to be a lot of momentum behind the decline. Nevertheless, I am looking at the short-side considering the recent price action and the dollar strength. As well, I think the same drivers that pushed the pound to dollar exchange rate up over 5% last month have faded.

There is some resistance here at 1.2800. I see a stronger confluence near 1.2880 consisting of the 50 and 100 moving averages on a 4-hour chart. It remains to be seen if we get there, but if we do, I think sellers will take the opportunity to establish positions considering the risk to reward from the level.

Bottom Line

  • GBP/USD is up a quarter percent as of writing on the back of a stronger dollar.
  • GPD growth has declined to a decade low this year.
  • The exchange rate is bouncing, if it turns into a broader recovery, I have my eye on resistance at 1.2880.
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