GBP/USD – Pound Dips Below 1.20 on Fears of Hard Brexit

The British pound started the week by briefly dropping below the 1.20 level. In Monday’s North American session, GBP/USD is trading at 1.2050. On the release front, British Rightmove HPI posted a gain of 0.4%. Later in the day, BoE Governor Mark Carney will deliver remarks at the London School of Economics. There are no US events, as US markets are closed for the Martin Luther King Holiday. With the currency markets characterized by thin trading, traders can expect limited movement in the North American session.  On Tuesday, Prime Minister Theresa May will deliver a speech in London, in which she is expected to discuss Brexit. As well, the UK will release CPI, which is expected to jump to 1.4%.

On Monday, media reports spread quickly that Theresa May was prepared for a “hard” exit from the European Union. Under such an arrangement, Britain will relinquish access to the single market but will have complete control over its immigration policy. Predictably, the news sent the pound below the 1.20 level for the first time since the “flash crash” in October. The pound moved higher after Downing Street denied the report. Still, anxious markets will be monitoring Prime Minister May’s speech on Tuesday, in which she will likely address the Brexit issue. Traders should be prepared for possible volatility after the speech. Meanwhile, British inflation indicators continue to move higher, as a weak pound has resulted in higher inflation. CPI rose to 1.2% in November and the upswing is expected to continue, with an estimate of 1.4% for the December report.

The US consumer remains optimistic early in the New Year and ahead of the Trump inauguration later this week. The UoM Consumer Sentiment in January was solid, but the markets had expected a stronger performance. The indicator was almost unchanged at 98.1, shy of the forecast of 98.6. Despite the optimism, US retail sales were a mix during the December holiday season. Retail Sales improved to 0.6%, edging above the estimate of 0.5%. However, much of the increase in spending was attributable to automobile sales, at the expense of other sectors of the economy. This was reflected in Core Retail Sales (which excludes car sales), which remained stuck at 0.2%, compared to a forecast of 0.5%. Still, analysts are confident that a bullish consumer will translate into strong spending numbers in the next few months. There was good news on the inflation front, as wholesale prices (measured by PPI) rose 0.3%, beating the forecast of 0.1%. This marked the third rise in four months, as inflation is pointing upwards due to higher oil prices. If inflation continues to climb towards the Federal Reserve target of 2.0%, we could see the Fed step in and raise interest rates. On Thursday, FOMC member Patrick Harker took note of the strong US economy and projected three “modest” rates from the Fed in 2017.  We’ll get another look at key inflation numbers on Wednesday, with the release of CPI and Core CPI.

Fed’s Harker Sees 3 Rate Hikes in 2017

The Pound Struggles

GBP/USD Fundamentals

Sunday (January 15)

• 19:01 British Rightmove HPI. Actual 0.4%

Monday (January 16)

• 13:30 BoE Governor Mark Carney Speech

Tuesday (January 17)

• 4:30 British CPI. Estimate 1.4%
• Tentative – Prime Minister Theresa May Speech

*All release times are EST

* Key events are in bold

GBP/USD for Monday, January 16, 2017

GBP/USD January 16 at 11:45 EST

Open: 1.2036 High: 1.2086 Low: 1.1985 Close: 1.2050

GBP/USD Technical

• GBP/USD was flat in the Asian session. The pair posted slight gains in European trade and is showing limited movement in North American session
• 1.1943 is providing support
• 1.2111 is the next resistance line

Further levels in both directions:

• Below: 1.1943, 1.1844 and 1.1559
• Above: 1.2111, 1.2272, 1.2351 and 1.2471
• Current range: 1.1943 to 1.2111

OANDA’s Open Positions Ratio

GBP/USD ratio is unchanged in the Monday session. Currently, long positions have a strong majority (68%). This is 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.