GBP/USD Fundamental Analysis – week of December 5, 2016

We had mentioned in our earlier weekly forecast and the daily forecast in the preceding days that the pound seems to be exceptionally strong and that it is only a matter of time before a slight dollar weakness sets in and when that happens, the pound will be well placed to take full advantage of that and this is what we have been seeing last week. We had a bit of dollar weakness last week and that was used by the GBPUSD pair to break through 1.26 and then on Friday, we saw the pair break through 1.27 for the first time since all the volatility over Brexit died down.

The key for the break on Friday came from the NFP data, which brought in strong numbers in terms of pure employment but the average wages took a dip which took out the sheen on the numbers. The theory behind a strong economy being based on strong employment numbers is the fact that if many people are employed, they get more to spend and they have more to save and invest and that is good for the economy as a whole. But, if the average wages decrease and people get jobs which are worth $10 an hour, it would mean that they dont even have enough to spend for their subsistence, leave alone having extra for spending and investing/saving. This was what was shown in the data on Friday and this weakened the dollar further which helped the pair to push through 1.27.

Looking ahead to the coming week, we have some important data like the Services PMI and Manufacturing Production from the UK and if this data comes out good and if the dollar continues to trade weak going into the Fed meeting in the middle of December, we should be able to see the pound challenging 1.300 in due course of time.