GBP/USD – Sterling Drops Below 1.32 on Soft Manufacturing, Services PMIs

The British pound has posted sharp losses on Friday and dipped below the 1.32 level. In the North American session, GBP/USD is trading slightly below the 1.32 level. The pair has weakened following soft PMI reports, with Manufacturing PMI coming in at 47.8 points, and Services PMI at 48.9 points.  In the US, there is just one event to wrap up the week. Flash Manufacturing PMI improved to 52.9 points, beating expectations.

British PMI reports are an important gauge of economic conditions, and Friday’s readings were unimpressive. Both indicators fell short of the 50-point threshold, indicating contraction in the services and manufacturing sectors. The soft readings are further indication of of economic fallout from the Brexit vote, in which the British electorate voted  to leave the European Union. Consumer indicators have also looked sluggish. Retail Sales posted a decline of 0.9% in June, well off the estimate of -0.4%. As well, GfK Consumer Confidence came in at -9 points in June, the survey’s sharpest decline since 1994. The post-Brexit economic outlook looks stormy and this was underlined by a new IMF report. The IMF lowered UK growth to 1.7% from 1.9% in the April forecast. The forecast for 2017 is worse, as the April projection of 2.2% has been reduced to just 1.3% on account of Brexit. There was more bad news during the week, as the Moody’s credit agency issued a warning that Britain’s economy could decline if it failed to reach a new trade agreement with Europe.

With the spotlight on the major central banks, it’s the turn of the Federal Reserve next week. The Fed meets for a policy meeting on July 27 but is unlikely to announce a rate hike at that time, given current economic conditions in the US. Is the Federal Reserve leaning more towards a rate hike before the end of the year? The markets appear to think so, as the chances of a rate hike this year has been priced in at 47%, up from just 20% at the start of July. This positive sentiment is a result of improved US economic data over the past week. Another rate hike will be data-dependent, so if key indicators beat expectations, speculation of a rate hike will continue to increase. However, the Fed will be hesitant to make a move if inflation remains stuck at very low levels, nowhere near the Fed’s target of around 2 percent.

GBP/USD Fundamentals

Friday (July 22)

• 4:30 British Manufacturing PMI. Estimate 47.8. Actual 49.1
• 4:30 British Services PMI. Estimate 48.9. Actual 47.4
• 9:45 US Flash Manufacturing PMI. Estimate 51.9. Actual 52.9

* Key releases are in bold

*All release times are EDT

GBP/USD for Friday, July 22, 2016

GBP/USD July 22 at 10:00 GMT

Open: 1.3234 High: 1.3290 Low: 1.3083 Close: 1.3093

GBP/USD Technical

• GBP/USD was flat in the Asian session and has posted sharp losses in the European session. The pair is showing limited movement early in the North American session
• 1.3142 has switched to a resistance role following sharp losses by GBP/USD in the European session
• 1.3064 is providing support. It is a weak line and could be tested in the North American session

Further levels in both directions:

• Below: 1.3064, 1.2938 and 1.2778
• Above: 1.3142, 1.3219, 1.3349 and 1.3513
• Current range: 1.3064 to 1.3142

OANDA’s Open Positions Ratio

GBP/USD ratio is showing gains in long positions on Friday, consistent with the sharp losses recorded by GBP/USD. Currently, long positions have a majority (54%), 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.