GBP/USD – Pound Slides to 10-Week Low on May’s Comments

The British pound continues to lose ground on the Monday session. In North American trade, GBP/USD is trading at 1.2160. On the release front, British Halifax HPI impressed with a strong gain of 1.7%, crushing the forecast of 0.3%. There are no major releases out of the US. On Tuesday, the US releases JOLTS Job Openings, which is expected to climb to 5.59 million.

The pound has hit a rough patch, dropping 2.4 percent since Friday. The US dollar ended the week with strong gains, courtesy of stronger wage growth in December. Average Hourly Earnings climbed 0.4%, edging above the estimate of 0.3%. This marked a strong turnaround after the November reading of -0.1%. The news was not as bright from Nonfarm Payrolls, which dropped to 156 thousand, well off the estimate of 175 thousand. This marked a 3-month low, but the dollar still posted gains. The slide continued on Monday, following comments from Prime Minister Theresa May in a weekend television interview. May bluntly said that the UK would be unable to keep “bits” of EU membership and added that it was crucial for the UK to maintain its own immigration policy. The markets read her comments as a signal that May was pushing a “hard Brexit” approach, in which the UK would give up access to the EU market in favor of immigration control. May tried to backtrack on Monday, insisting that she was looking for the best deal possible for the UK, which didn’t necessarily mean a “soft” or “hard” Brexit. Still, May hasn’t provided details of an exit strategy, leading to criticism that the government does not have a clear plan to leave Europe. If the government doesn’t provide more details of its Brexit strategy soon, nervous markets could send the pound even lower.

British PMIs were perfect in December, as all three reports climbed higher and beat the forecasts. On Thursday, Services PMI improved to 56.2 points, its best showing since July 2015. This reading followed Construction and Manufacturing PMIs, which also posted readings well above the 50 level, pointing to expansion in these respective sectors. The economy has enjoyed a solid fourth quarter in 2016, but Brexit jitters could return in early 2017, as the UK and Europe prepare to commence negotiations over Britain’s departure from the European Union. British Prime Minister Theresa May has said she wants to formally launch negotiations with the by the end of March, but there seems to be little goodwill between the parties. Last week, the British envoy to the EU, Ivan Rogers, abruptly resigned. Rogers wrote a scathing goodbye letter, saying the government’s negotiating objectives were unclear. Predictably, Brexit supporters downplayed the resignation, but it could be a sign of stormy times ahead as Britain prepares to say goodbye to the EU. 

The US dollar was broadly lower on Thursday, after the Federal Reserve released the minutes of its December meeting. The minutes were cautious in tone, with Fed policymakers essentially saying that monetary policy in the coming months will be dictated in large part by the economic platform of the incoming Trump administration, which remains unclear. FOMC members expressed concern about higher inflation levels, given the “prospects for more expansionary fiscal policies in the coming years”. This is a clear reference to president-elect Trump’s plans to increase fiscal spending and cut taxes, which would likely result in higher inflation, something the US hasn’t had to deal with in years. Still, policymakers haven’t changed their view that gradual rate hikes remains an appropriate monetary policy. Many analysts are predicting another rate hike in June, but this forecast could easily change, depending on the performance of the US economy in the first half of 2017.

May Delivers Another Brexit Blow to Sterling

Sterling Battered on PM May’s Comments

GBP/USD Fundamentals

Monday (January 9)

• 3:30 British Halifax HPI. Estimate 0.3%. Actual 1.7%
• 10:00 US Labor Market Conditions Index. Actual -0.3
• 15:00 US Consumer Credit. Estimate 18.3B

Tuesday (January 10)

• 10:00 US JOLTS Job Openings. Estimate 5.59M

*All release times are EST

* Key events are in bold

GBP/USD for Monday, January 9, 2017

GBP/USD January 9 at 10:40 EST

Open: 1.2256 High: 1.2270 Low: 1.2119 Close: 1.2163

GBP/USD Technical

• GBP/USD edged lower in the Asian session and continued with strong losses in European trade. The pair has edged higher in the North American session
• 1.2111 is providing support
• 1.2272 is the next resistance line

Further levels in both directions:

• Below: 1.2111, 1.1943 and 1.1844
• Above: 1.2272, 1.2351, 1.2471 and 1.2620
• Current range: 1.2111 to 1.2272

OANDA’s Open Positions Ratio

In the Monday session, GBP/USD ratio is showing long positions with a strong majority (67%). This is 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.