Weekly Analysis and Recommendations: The GBP/USD had a tumultuous week, finishing lower after pressing a two-month high at the start of the week.
The GBP/USD had a tumultuous week, finishing lower after pressing a two-month high at the start of the week. Technical factors largely dominated the market as the Sterling took out a couple of weeks of lows on its way to breaking through the 1.5424 main bottom. The sell-off started earlier in the week when China calmed the financial markets by cutting its one-year lending rate and lowering its reserve requirement. China also sold a boatload of Yuan to support its financial system, driving up the U.S. Dollar.
The action by the People’s Bank of China not only strengthened the U.S. Dollar, but also the Australian Dollar and New Zealand Dollar as investors felt more comfortable taking on more risk after the sharp break to begin the week.
After reaching a high at 1.5817 on August 25, the rally stopped abruptly triggering a sharp three day sell-off. To put it in another perspective, the GBP/USD went from its highest level since June 22 to its lowest level since July 8 in just four trading sessions.
The turbulence created by the sell-off in China’s stock market made everyone a stock trader last week even if you didn’t do it directly. The sharp break then rebound rally triggered huge responses by the U.S. Dollar and Euro. This left the British Pound somewhere in the middle. There were no major reports last week, just good old fashioned volatility-driven moves by the dollar and Euro. With capital flowing in and out of these two currencies, there wasn’t much left to support the Sterling, triggering the sharp reversal to the downside.
Compounding the lack of interest in the British Pound was the stronger-than-expected U.S. Durable Goods and GDP reports. While they may have put the Fed back on track for an interest rate hike, it may not be enough to lead to a rate hike in September. The financial markets are just too unstable at this time for the Fed to hike rates for the first time since 2006. However, if China’s economy responds to its stimulus measures and the U.S. economy continues to improve then the Fed will likely raise rates before the end of the year.
After the markets settle, traders will likely continue to react to the divergence between the Bank of England and Fed monetary policies. The BoE indicated on “Super Thursday” earlier in the month that it is not going to raise rates this year. Investors have pushed back expectations for the first BoE hike to August 2016.
At this time, investors are looking for a shot of confidence to revive interest in the long side of the GBP/USD after disappointing consumer inflation and retail data earlier in the month. The starting point could be this week’s PMI data. Manufacturing PMI will be the key report with traders looking for a reading of 51.5. This is followed by the Services PMI report, which is expected to show a reading of 57.6 and the Construction PMI which should show a similar reading.
The main driver of the price action this week will be Friday’s U.S. Non-Farm Payrolls report. The report is expected to show the economy added 220K jobs in August. The unemployment rate is expected to decline slightly to 5.2%.
No one is expecting the GBP/USD to completely recover from the recent sell-off and generally bearish conditions, but this week’s UK PMI data may be enough to produce a short-term correction until the release of the jobs data. The fate of the GBP/USD until the next Fed meeting will likely be determined by the results of this report.
FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.
Important Reports to Watch This Week:
Date Time Curr Event Forecast Previous
Mon Aug 31 |
9:45am ET |
USD |
Chicago PMI |
54.7 |
54.7 |
||||
Tue Sep 1 |
4:30am ET |
GBP |
Manufacturing PMI |
51.9 |
51.9 |
||||
GBP |
Net Lending to Individuals m/m |
3.9B |
3.8B |
||||||
10:00am ET |
USD |
ISM Manufacturing PMI |
52.6 |
52.7 |
|||||
Wed Sep 2 |
4:30am ET |
GBP |
Construction PMI |
57.6 |
57.1 |
||||
8:15am ET |
USD |
ADP Non-Farm Employment Change |
204K |
185K |
|||||
8:30am ET |
USD |
Revised Nonfarm Productivity q/q |
2.9% |
1.3% |
|||||
10:00am ET |
USD |
Factory Orders m/m |
0.8% |
1.8% |
|||||
10:30am ET |
USD |
Crude Oil Inventories |
-5.5M |
||||||
Thu Sep 3 |
4:30am ET |
GBP |
Services PMI |
57.6 |
57.4 |
||||
8:30am ET |
USD |
Trade Balance |
-43.2B |
-43.8B |
|||||
USD |
Unemployment Claims |
273K |
271K |
||||||
10:00am ET |
USD |
ISM Non-Manufacturing PMI |
58.3 |
60.3 |
|||||
Fri Sep 4 |
Day 1 |
ALL |
G20 Meetings |
||||||
8:10am ET |
USD |
FOMC Member Lacker Speaks |
|||||||
8:30am ET |
USD |
Average Hourly Earnings m/m |
0.2% |
0.2% |
|||||
USD |
Non-Farm Employment Change |
220K |
215K |
||||||
USD |
Unemployment Rate |
5.2% |
5.3% |
||||||
Sat Sep 5 |
Day 2 |
ALL |
G20 Meetings |
James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.