GBP/USD – Pound Edges Higher, Services PMI Beats Estimate

GBP/USD has ticked higher on Wednesday, following sharp losses in the Tuesday session. In the North American session, the pair is trading at 1.2750. On the release front, British Services PMI pointed to slight expansion in the services sector, with a reading of 52.6. This beat the forecast of 52.1. In the US, ADP Employment Change slipped to 154 thousand, short of the forecast of 166 thousand.  There was excellent news from the services sector, as ISM Non-Manufacturing PMI jumped to 57.1, above the forecast of 53.1. On Thursday, the US will release Unemployment Claims, with the estimate standing at 255 thousand.

Are we seeing the beginning of a sharp slide for the British pound? The currency has posted sharp losses this week, losing close to 200 points against the US dollar. On Tuesday, the pound dropped below the 1.27 line for the first time since June 1985. The currency is belatedly responding to ongoing market fears over “hard Brexit”, as EU leaders have consistently told Whitehall that it cannot expect unrestricted access to the European Union and at the same time impose immigration and labor movement restrictions against the continent. On Tuesday, consultancy firm Oliver Wyman projected that the loss of unrestricted access to the EU markets could cost Britain 38 billion pounds in revenue. British numbers in the third quarter have been better than expected, but this has not improved the market’s mood. Although manufacturing and construction PMIs handily beat their estimates this week, the pound nevertheless headed southward. The Bank of England is expected to lower interest rates in November, which is also weighing on the British currency.

US employment numbers will be in the spotlight over the next few days. The ADP payroll report was a disappointment, dropping to 154 thousand, its lowest gain since February 2014. With the odds of a December rate hike priced in at about 55%, Friday’s triple-release of US job numbers will be especially important. The markets are expecting some improvement in the September numbers. Non-farm Employment Change is expected to improve to 171 thousand, while Average Hourly Earnings, which measures wage growth, is forecast to edge higher to 0.2%. The unemployment rate has held steady at 4.9% for three months and no change is expected. If the markets are correct and September shows stronger numbers, the US dollar could pick up some ground against the pound.

The Fed remains divided over the timing of a rate hike, and this was underscored at the September meeting, when three of the ten FOMC members voted against the decision to hold rates at 0.25%, voting instead in favor of an immediate rate hike. On Tuesday, FOMC member Jeffrey Lacker, one of seven non-voting members, said that he would have voted in favor of a rate hike at the last meeting had he been able to vote. The strong dissent in the September rate decision has not helped the credibility of the Fed, which had promised a series of rate hikes in 2016, but has opted for the sidelines since its quarter-point hike last December. Continuing mixed messages from the Fed make it difficult for the markets to ascertain what the Fed has planned regarding monetary policy and whether it will press the rate trigger in December or wait until next year.

GBP/USD Fundamentals

Wednesday (October 5)

• 4:30 British Services PMI. Estimate 52.1. Actual 52.6
• 8:15 US ADP Nonfarm Employment Change. Estimate 166K. Actual 154K
• 8:30 US Trade Balance. Estimate -41.1B. Actual  -40.7B
• 9:45 US Final Services PMI. Estimate 51.9. Actual 52.3
• 10:00 US ISM Non-Manufacturing PMI. Estimate 53.1. Actual 57.1
• 10:00 US Factory Orders. Estimate -0.4%. Actual +0.2%
• 10:30 US Crude Oil Inventories. Estimate +1.1M. -3.0M

Upcoming Key Events 

Thursday (October 6)

• 8:30 US Unemployment Claims. Estimate 255K

*All release times are EDT

* Key events are in bold

GBP/USD for Wednesday, October 5, 2016

GBP/USD October 5 at 10:40 EDT

Open: 1.2728 High: 1.2755 Low: 1.2682 Close: 1.2732

GBP/USD Technical

• GBP/USD was flat in the Asian session. In European trade, the pair posted losses but recovered. GBP/USD has posted losses in the North American session
• 1.2612 is providing strong support
• 1.2778 is a weak resistance line

Further levels in both directions:

• Below: 1.2612, 1.2525 and 1.2447
• Above: 1.2788, 1.2899 and 1.3033
• Current range: 1.2612 to 1.2778

OANDA’s Open Positions Ratio

GBP/USD ratio is showing long positions with a strong majority (71%). This is indicative of trader bias towards GBP/USD continuing to move to higher ground.

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.