GBP/USD – Pound Slides Despite Rare Budget Surplus

The British pound has posted sharp losses on Friday, reversing directions after strong gains on Thursday. Early in the North American session, GBP/USD is trading at 1.3060. On the release front, it’s a quiet end to the week, with just one UK release. Public Sector Net Borrowing posted a surplus of GBP 1.5 billion in July, well above expectations. There are no US events on the schedule.

Are fears about the British economy turning into a case of Chicken Little? There has been widespread concerns that “hard” UK data in the third quarter would point to a sputtering British economy due to Brexit, and this sentiment had contributed to the recent weakness in the pound, which slipped to 4-week lows at the start of the week. However, July releases have looked sharp, and the pound has rebounded nicely, climbing 1.5% this week. CPI started things rolling with a gain of 0.6%, its best showing since November 2014. This continued with solid employment numbers, as unemployment rolls shrunk by 8.6 thousand and wage growth jumped 2.4%. Retail Sales impressed with a gain of 1.4%, crushing the estimate of 0.1%. On Friday, Public Sector Net Borrowing followed suit, posting a rare surplus. The indicator came in at GBP 1.3 billion, although this was short of the forecast of GBP 2.3 billion. Still, the reading marked the first monthly surplus since January. If British numbers continue to defy the Brexit doomsayers, the government may be able to avoid adopting stimulus measures in the fall budget. The BoE demonstrated iron resolve and took drastic monetary action in August, cutting interest rates to an all-time low of 0.25% and expanding its asset-purchase program to GBP 435 billion. A significant economic report card will be delivered on August 26, with the release of Second Estimate GDP. If the indicator can match or beat the forecast of 0.6%, the pound could post strong gains.

If the markets were hoping for some clarity from the Federal Reserves minutes release, they are likely even more confused on the day after. The minutes, which provided the details of the July policy meeting, indicated that FOMC members are deeply divided on the timing of a rate hike – some want to raise levels soon, as the US labor market approaches full employment, while others expressed concern about making a move with inflation levels well below the target of 2%. Recent data is pointing in all directions, which helps explains why the Fed is divided over the timing of a rate hike. After a soft GDP report in late July, nonfarm payrolls was stellar. However, this was followed by weak retail sales and CPI numbers. We’ll likely hear FOMC members continue to express their views ahead of the meeting of central bankers at Jackson Hole next week. The rate debate needs to be resolved one way or another, as the Fed must set rates at its policy meeting next month. Policymakers will be fine-combing through key economic data, particularly employment and inflation numbers. The news remains bleak on the inflation front, as underscored by July’s consumer inflation reports. CPI posted a weak reading of 0.0%, its worst showing in five months. Core CPI dropped to 0.1%, shy of the estimate of 0.2%. As of now, a September hike is virtually off the table, while the Fed could go either way in December, with the odds of a December hike pegged at 50/50.

GBP/USD Fundamentals

Friday (August 19)

• 4:30 British Public Sector Net Borrowing. Estimate -2.3B. Actual -1.5B

*Key releases are highlighted in bold

*All release times are EDT

GBP/USD for Friday, August 19, 2016

GBP/USD August 19 at 8:30 GMT

Open: 1.3162 High: 1.3163 Low: 1.3052 Close: 1.3068

GBP/USD Technical

• GBP/USD has posted slight losses in both the Asian and European sessions. The pair has posted considerable losses in North American trade
• 1.3064 is under strong pressure in support. This line could break in the North American session
• 1.3142 has strengthened in resistance following sharp losses by GBP/USD on Friday

Further levels in both directions:

• Below: 1.3064, 1.2938 and 1.2865
• Above: 1.3142, 1.3219, 1.3327 and 1.3480
• Current range: 1.3064 to 1.3142

OANDA’s Open Positions Ratio

GBP/USD ratio is unchanged on Friday. Currently, long positions have a majority (57%), indicative of trader bias towards GBP/USD reversing directions and moving upwards.

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.