GBP/USD Finishes Volatile Week Sharply Lower

James Hyerczyk

The GBP/USD had a terrible week and is set to finish sharply lower. 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 banks’ reserve requirement. China also sold a boatload of Yuan to support its financial system.

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 EUR/USD also had a volatile week. The volatility created by the turbulence in the global equity markets drove the Forex pair to its highest level since January 15 before sellers came in to knock off more than .05 in just three days.

Not only did the easing of tensions out of China drive the British Pound and Euro sharply from their highs, but stronger-than-expected U.S. economic reports also played a role in the selling pressure. These reports were durable goods and GDP.

December Comex Gold futures broke sharply when the dollar and the U.S. equity markets responded positively to the Chinese stimulus. The sell-off this week reaffirmed the downtrend that had been temporarily derailed by the turmoil in the financial markets.

Crude oil was the big winner this week as investors responded positively to a big drawdown in inventories. The move was triggered by a U.S. Energy Information Administration inventories report for the week-ending August 21, which showed that demand outstripped supply for the week. The EIA reported a 5.5 million barrel decline versus an estimate of a 1.0 million barrel increase.

 In other news, German preliminary CPI was flat at 0.0%. Traders were looking for a reading of -0.1%. Spanish Flash CPI was down 0.4% versus an estimate of -0.1%. In the U.K., Second Estimate GDP came in as expected at 0.7%. However, preliminary business investment rose 2.9% versus an estimate of 1.6%.

The U.S. Goods Trade Balance was -59.1 billion. Last month, it was 62.3 billion. Personal Spending was up 0.3%, slightly below the estimate of 0.4% and equal to last month’s reading. Revised University of Michigan Consumer Sentiment came in at 91.9, below the estimate of 93.2 and last month’s reading of 92.9.

At 2:15 pm. ET, traders will be looking for guidance regarding the timing of the next interest rate hike when FOMC Member Lockhart delivers a speech. 

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