GBP/USD – Pound Edges Lower as Construction PMI Slides

The British pound has posted slight losses on Monday, as GBP/USD trades at 1.3250. On the release front, British Construction PMI shocked with a reading of 46.0 points, well short of expectations. The US is celebrating Independence Day, so US markets are closed and there are no US events on the schedule. On Tuesday, the UK releases Services PMI and BoE Governor Mark Carney will hold a press conference following the release of the BoE Financial Stability Report.

It was an awful start to the week for British indicators, as Construction PMI plunged to 46.0 points, pointing to contraction in the construction sector. This reading was well short of the estimate of 50.6 points, and marked the indicator’s worst showing since 2009. The pound has not been able to find its footing since plunging after Brexit, and continues to trade at 30-year lows. The pound dropped sharply last week, following comments from Mark Carney. The normally even-keel BoE Governor was surprisingly blunt, stating that the BoE planned to lower interest rates during the summer.

The Brexit vote to leave the European Union continues to cause deep instability in Europe and the UK and wiped out a staggering $3 trillion from global stock markets. Although the financial markets have stabilized, the British pound has shed about 11 percent since the vote, and continued to drop last week. British politicians have sought to calm the public and the markets, but the pound’s sharp drop on Thursday underscores that the situation is anything but normal. The country’s political picture is fluid, as the Conservatives are choosing a new leader, the Labor Party is in turmoil and elections may not be far away. On the financial front, the pound and the markets have taken a beating and London’s position as a world financial center has been shaken. The UK may have voted “Out”, but there is no timetable as to when the exit will take place or what type of trade agreement will define the new economic relationship between the EU and Britain. British leaders are in no rush to leave, but European leaders have called on Britain to exit as soon as possible in order to minimize the uncertainty and instability caused by the Brexit vote. When it comes to the EU Britain finds itself in limbo (“neither in nor out”), and such uncertainty is likely to weigh on the struggling pound until some decisions are reached regarding Britain’s exit from the EU.

With the financial markets understandably focused on the stunning Brexit vote, the Federal Reserve’s monetary policy has shifted to the back-burner. That could change later this week, with the release of the Federal Reserve minutes. Will the minutes provide any clues about a rate hike? Yellen and her colleagues have sounded cautious about the US economy, and the financial instability caused by Brexit could delay any hikes until 2017. Gone are the heady days of last December, when the Fed raised rates and talked about a series of rate hikes in 2016. Meanwhile, June has come and gone, and the Fed hasn’t made a move so far this year. Bottom line? Traders shouldn’t count on an imminent rate hike to boost the US dollar; rather, the direction of the currency will largely be data-dependent – the Fed is unlikely to seriously consider any rate hikes unless we see significantly improved employment and inflation numbers.

GBP/USD Fundamentals

Monday (July 4)

• 4:30 British Construction PMI. Estimate 50.6. Actual 46.0

Upcoming Key Events

Tuesday (July 5)

• 4:30 British Services PMI. Estimate 53.1
• 6:00 BOE Governor Mark Carney Speaks

* Key releases are in bold

*All release times are GMT

GBP/USD for Monday, July 4, 2016

GBP/USD July 4 at 7:20 GMT

Open: 1.3282 Low: 1.3242 High: 1.3306 Close: 1.3255

GBP/USD Technical

• GBP/USD has showed limited movement in the Asian and European sessions
• 1.3142 is providing support
• 1.3276 was tested in resistance earlier and could see action during the Monday session

Further levels in both directions:

• Below: 1.3142, 1.3064 and 1.2991
• Above: 1.3276, 1.3426 and 1.3514
• Current range: 1.3142 to 1.3276

OANDA’s Open Positions Ratio

GBP/USD ratio is showing long positions with a majority (61%). This is indicative of trader bias towards GBP/USD reversing directions and moving higher.

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.