GBP/USD – Pound Moves Higher as British Services PMI Beats Estimate

The British pound has posted considerable gains on Thursday. In North American trade, GBP/USD is trading at the 1.24 line. On the economic front, British Services PMI climbed to 56.2 points, beating the forecast of 54.8 points. In the US, ADP Nonfarm Employment Change disappointed with a reading of 153 thousand, well off the forecast of 171 thousand. There was better news from unemployment claims, which dropped to a 7-week low at 235 thousand. Later in the day, the US releases ISM Non-Manufacturing PMI. US employment numbers will be in the spotlight on Friday, with three releases – Nonfarm Payrolls, Average Hourly Earnings and the Unemployment Rate.

It was a perfect score for British PMIs in December, as all three reports 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. On Wednesday, 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 Federal Reserve was on center stage on Wednesday, as the Fed released the minutes of its policy meeting in December. At the meeting, the Fed raised rates by a quarter point for the only time in 2016. The minutes indicated that FOMC members are concerned 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 Fed  hasn’t had to deal with for years. Still, policymakers appear unchanged in their view that gradual rate hikes remains an appropriate monetary policy. The Fed members acknowledged that there is “considerable uncertainty” regarding future fiscal and economic programs. Many analysts are predicting another rate hike in June, but this could of course change, depending on how the effect that Trump’s economic platform has on the US economy. The Fed will need at least a few months to digest the economic stance of the incoming administration, and the uncertainty mentioned in the Fed minutes could lead to volatility in the markets in what promises to be an interesting first quarter of 2017.

UK Risks Losing EU Funding

Has Sterling Overreacted to Brexit?

Dollar Bleeds on Fed Uncertainty

GBP/USD Fundamentals

Thursday (January 5)

• 4:30 British Services PMI. Estimate 54.8. Actual 56.2 
• 7:30 US Challenger Job Cuts. Actual 42.4%
• 8:00 BoE Chief Economist Andy Haldane Speech
• 8:15 US ADP Nonfarm Employment Change. Estimate 171K. Actual 153K
• 8:30 US Unemployment Claims. Estimate 262K. Actual 235K
• 9:45 US Final Services PMI. Estimate 53.4
• 10:00 US ISM Non-Manufacturing PMI. Estimate 56.6
• 10:30 US Natural Gas Storage. Estimate -97B
• 11:00 US Crude Oil Inventories. Estimate -1.8M

Friday (January 6)

• 8:30 US Average Hourly Earnings. Estimate 0.3%
• 8:30 US Nonfarm Employment Change. Estimate 175K
• 8:30 US Unemployment Change. Estimate 4.7%

*All release times are EST

* Key events are in bold

GBP/USD for Thursday, January 5, 2017

GBP/USD January 5 at 10:45 EST

Open: 1.2322 High: 1.2374 Low: 1.2270 Close: 1.2389

GBP/USD Technical

• GBP/USD showed limited movement in the Asian session. The pair has been choppy in European trade and has posted strong gains in the North American session
• 1.2351 has switched to support following gains by GBP/USD in the Thursday session
• 1.2471 is the next resistance line

Further levels in both directions:

• Below: 1.2351, 1.2272, 1.2111 and 1.1943
• Above: 1.2471, 1.2620 and 1.2775
• Current range: 1.2351 to 1.2471

OANDA’s Open Positions Ratio

GBP/USD ratio is almost unchanged in the Thursday session. Currently, long positions have a strong majority (62%). This is indicative of trader bias towards GBP/USD breaking out 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.