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Jignesh Davda
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GBP/USD

UK Services PMI Falls Into Contraction

After briefly stabilizing, the UK service sector fell back into a decline with a print of 49.3 in the PMI reading for November. The data points to staggering growth in the fourth quarter as businesses wait to gain further clarity on the election and Brexit. IHS Markit’s data signals a quarterly decline of 0.1% in GDP growth.

The data release did not have much of an impact on the exchange rate which is rallying following a notable technical break in the early week.

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The pound to dollar exchange rate had been consolidating within a range for about five weeks. Yesterday, some upward movement lead to a bullish break of a technical pattern. Follow up is seen in the pair today and as a result, it trades at a level not seen since May 2018.

The upward price pressure is mainly attributed to growing expectations of a Tories victory after last week’s well-respected YouGov poll showed a 10 point lead.

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Technical Analysis

The bullish break in GBP/USD is significant and should not be ignored. The pair broke out from a bull flag in the early week that had been forming since October 22.

Further, the exchange rate now trades comfortably above 1.3000 which is a level that has proved to be a major hurdle in recent times.

GBPUSD 4-Hour Chart

The pair last traded near 1.3050 which might offer a small hurdle considering its psychological influence. There is some resistance from the upper bound of a trend channel that has encompassed price action over the last week.

While this might lead to a small pullback over the near-term, the broader expectation for GBP/USD is certainly for more upside.

Considering the upward momentum in the pair since September, and the breakout we are seeing now, buyers are likely to keep this pair well bid on dips.

With the UK election just a week away, a driver is certainly present for volatility in the pair. I think the pair can continue higher into the election, as long as the polls from now until then don’t show a significant deviation from what we’ve already seen.

Bottom Line

  • GBP/USD shows follow-through after Monday’s bullish technical break.
  • The pair has made a sustained break above a major resistance level at 1.3000.
  • We could see this upward momentum continue into next week’s UK election.
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