GBP/USD – Pound Steady Ahead of British GDP, Fed Statement

The British pound continues to have an uneventful week. GBP/USD is currently trading slightly above the 1.31 line. On the release front, there was only one British event on the schedule, as BBA Mortgage Approvals was very close to the estimate. Later in the day, the US releases key consumer confidence and housing numbers. CB Consumer Confidence is expected to drop to 95.6 points, while New Home Sales is expected to improve to 560 thousand. On Wednesday, the US releases durable goods orders and the FOMC policy statement.

British PMI reports were unimpressive on Friday, pointing to contraction in the services and manufacturing sectors. The soft readings are further indication of of economic fallout from the Brexit vote, in which the British electorate voted to leave the European Union. Consumer indicators have also looked sluggish. Retail Sales posted a decline of 0.9% in June, well off the estimate of -0.4%. As well, GfK Consumer Confidence came in at -9 points in June, the survey’s sharpest decline since 1994. Markit Economics, which publishes the PMI reports, issued a note on Friday, saying that the British economy has undergone “dramatic deterioration” as a result of the Brexit vote. In the wake of Brexit, the EU and Britain will have to hammer out and a new economic relationship and any developments with regard to the negotiations could clarify matters and lend some stability to the markets. So far, however, the only certainty is that negotiations will not commence anytime soon, as the British government has said that it will not invoke the exit mechanism (Article 50 of the Treaty of Lisbon) before the end of 2016. Meanwhile, G-20 finance ministers met in China on the weekend. The group acknowledged that Brexit vote would add uncertainty to global economic conditions, but expressed confidence that this challenge would be met. The G-20 also stated it would refrain from competitive devaluations, an issue that remains a source of contention between Japan and the United States regarding the Japanese yen.

The Fed meets for a policy meeting on Wednesday and is widely expected to maintain current interest rate levels of 0.25% – 0.50%. However, with the US posting some solid numbers in the past few weeks, speculation has risen that the bank could raise rates before the end of the year. Another rate hike will be data-dependent, so if key indicators beat expectations, the likelihood of a rate hike will continue to increase. Still, there are some key factors which mitigate against a hike in the next few months. First, inflation remains stuck at low levels, well short of the Fed’s target of around 2 percent. Fed policymakers will be hesitant to raise rates if inflation is not projected to point upwards. Second, most of the recent data is from June, and does not fully take into account the Brexit vote on June 23. Fed members have expressed concern about the economic fallout from Brexit, and will want to review releases coming out in August and September in order to gauge the effects of Brexit.

GBP/USD Fundamentals

Tuesday (July 26)

• 4:30 UK BBA Mortgage Approvals. Estimate 40.2K. Actual 40.1K
• 9:00 US S&P/CS Composite-20 HPI. Estimate 5.6%
• 9:45 US Flash Services PMI. Estimate 51.2
• 10:00 US CB Consumer Confidence. Estimate 95.6
• 10:00 US New Home Sales. Estimate 560K
• 10:00 US Richmond Manufacturing Index. Estimate -4

Upcoming Key Events

Wednesday (July 27)

• 4:30 UK Preliminary GDP. Estimate 0.5%
• 8:30 US Core Durable Goods Orders. Estimate 0.3%
• 14:00 US FOMC Statement
• 14:00 US Federal Funds Rate. Estimate <0.50%

* Key releases are in bold

*All release times are EDT

GBP/USD for Tuesday, July 26, 2016

GBP/USD July 26 at 7:30 GMT

Open: 1.3103 High: 1.3151 Low: 1.3053 Close: 1.3114

GBP/USD Technical

• GBP/USD was flat in the Asian session. In European trade, the pair posted slight losses but then recovered
• 1.3142 was tested earlier in resistance and is a weak line
• 1.3064 is providing support

Further levels in both directions:

• Below: 1.3064, 1.2938 and 1.2778
• Above: 1.3142, 1.3219, 1.3349 and 1.3513
• Current range: 1.3064 to 1.3142

OANDA’s Open Positions Ratio

GBP/USD ratio is unchanged on Tuesday, consistent with the lack of movement from GBP/USD. Currently, long positions have a majority (55%), indicative of trader bias towards GBP/USD breaking out and moving higher.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.