GBP/USD – Pound Pushes Above 1.31, British Manufacturing Report Ahead

The British pound has started the week with considerable gains. Early in Monday’s North American session, GBP/USD is trading at the 1.31 line. On the release front, there are no events out of the UK or US. On Tuesday, the US releases New Home Sales, a key indicator.

The Brexit referendum vote to leave the European Union in June shook up the financial markets and sent the pound plunging to 30-year lows. Ever since then, there has been widespread concerns that “hard” UK data in the third quarter would point to a sputtering British economy, possibly even point a recession. However, July releases across the economy looked sharp and the pound gained 1.2% last 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.

Central bank heads and other senior financial officials will meet for the annual tête-à-tête in Jackson Hole on Thursday, and the markets will be looking for hints from Federal Reserve chair Janet Yellen regarding the Fed’s monetary plans, particularly the timing a rate hike. FOMC members are expected to express their views ahead of the key meeting. Fed Vice Chairman Stanley Fischer took the opportunity and sounded upbeat about the US economy, saying that the Fed was close to its aims of a full labor market and the inflation target of 2 percent. The latter claim sounds a bit optimistic, as US inflation levels have consistently been closer to zero than the 2 percent level. It will be interesting to see if Janet Yellen follows suit and expresses satisfaction with current inflation levels.

Any market players who were hoping for some clarity from last week’s Federal Reserves minutes were likely none the wiser after combing through the minutes. The release, 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 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. The great 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 upcoming economic releases, 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 the odds of a December hike are around 40%.

GBP/USD Fundamentals

Monday (August 22)

• There are no British or US events on the schedule

Tuesday (August 23)

• 6:00 British CBI Industrial Order Expectations. Estimate minus -9
• 10:00 US New Home Sales. Estimate 575K

*All release times are EDT

* Key events are in bold

GBP/USD for Monday, August 22, 2016

GBP/USD August 22 at 9:00 GMT

Open: 1.3061 High: 1.3121 Low: 1.3033 Close: 1.3102

GBP/USD Technical

• GBP/USD was flat in the Asian session. The pair has posted considerable gains in the European session and is unchanged early in North American trade.
• 1.3064 is providing support
• 1.3142 is a weak resistance line

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 showing little movement. Currently, long positions have a majority (59%), indicative of trader bias towards GBP/USD continuing to move 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.