GBP/USD – Pound Jumps as Construction PMI Beats Expectations

The British pound has posted sharp gains on Tuesday. Early in the North American session, GBP/USD is trading slightly below the 1.33 level. On the release front, it’s a quiet day. British Services PMI came in at 45.9 points, beating expectations. In the US, Personal Spending climbed 0.4%, edging above the forecast of 0.3%. On Wednesday, we’ll get a look at British Manufacturing PMI, with the markets expecting a weak reading of 47.4 points. The US will release two key events – ISM Non-Manufacturing PMI and ADP Nonfarm Employment Change.

British PMI reports, which are key economic indicators, are being closely watched by the markets. A special Manufacturing PMI report was published on July 22, covering the 4-week period immediately following the Brexit vote. The index dropped to 49.1 points, indicating contraction. The news was even worse on Monday, as the July Manufacturing PMI dipped to 48.2 points. On Tuesday, Construction PMI also pointed to contraction, with a reading of 44.9 points. Still, this was considerably better than the estimate of 44.9, and the pound has reacted with sharp gains. There are growing worries that additional third quarter numbers, including GDP reports, will point to a weakening British economy due to the fallout from Britain’s surprise decision to leave the European Union. The markets will also be keeping a close eye on the BoE, which is widely expected to cut interest rates when it meets on Thursday. The BoE surprised the markets in July when it maintained rates at 0.50%, but faces losing credibility if it stays on the sidelines again. The bank hasn’t lowered rates since 2009, so such a dramatic move could push the pound to lower levels.

On Friday, the US dollar was broadly lower, courtesy of a surprisingly soft US GDP report. US Preliminary GDP for the second quarter was projected at 2.6%, but posted a much smaller gain of 1.6%. The pound posted considerable gains, climbing back above the 1.32 line. The soft reading not only pushed the dollar lower, but has dampened enthusiasm regarding a rate hike by the Fed, which last week stayed on the sidelines yet again. On Monday, FOMC William Dudley, a close ally of Janet Yellen, said that the Brexit fallout posed a risk to the US economy and urged the Fed to proceed with caution before raising interest rates. The US will release wage growth and nonfarm payrolls later in the week, and these key employment numbers will be carefully monitored by the Fed as it mulls over a possible rate hike. If these releases do not meet expectations, the likelihood a move in September will sharply decrease.

GBP/USD Fundamentals

Tuesday (August 2)

• 4:30 British Construction PMI. Estimate 44.2. Actual 45.9
• 8:30 US Core PCE Price Index. Estimate 0.1%. Actual 0.1%
• 8:30 US Personal Spending. Estimate 0.3%. Actual 0.4%
• 8:30 US Personal Income. Estimate 0.3%. Actual 0.2%
• All Day – US Total Vehicle Sales. Estimate 17.1M
• 19:01 British BRC Shop Price Index

Upcoming Key Events

Wednesday (August 3)

• 4:30 British Services PMI. Estimate 47.4
• 8:15 ADP Non-Farm Employment Change. Estimate 171K
• 10:00 US ISM Non-Manufacturing PMI. Estimate 56.0

*All release times are EDT

GBP/USD for Tuesday, August 2, 2016

GBP/USD August 2 at 8:50 GMT

Open: 1.3183 High: 1.3295 Low: 1.3168 Close: 1.3284

GBP/USD Technical

• GBP/USD was flat in the Asian session. The pair has posted sharp gains in European trade
• 1.3219 has switched to a support level following strong gains by GBP/USD
• There is resistance at 1.3359

Further levels in both directions:

• Below: 1.3219, 1.3142, 1.3064 and 1.2938
• Above: 1.3359, 1.3513 and 1.3667
• Current range: 1.3219 to 1.3359

OANDA’s Open Positions Ratio

GBP/USD ratio is almost unchanged on Tuesday. Long positions have a majority (53%), indicative of trader bias towards GBP/USD continuing to gain 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.