Pound Moves Higher Despite Soft UK Services PMI

The British pound has started the week with moderate gains. In Monday’s North American session, GBP/USD is trading at 1.2920. On the release front, British Services PMI was a disappointment, dropping to 53.8 in May. This missed the estimate of 55.1 points. In the US, ISM Non-Manufacturing PMI pointed to a slowdown in the services sector, dropping to 56.9 points. This was shy of the estimate of 57.1 points. Later in the day, the UK releases BRC Retail Sales.

The terrorist attack on London Bridge has badly shaken the UK, and the timing couldn’t be worse for Prime Minister Theresa May. Just a few weeks ago, May appeared destined to increasing her majority, and the election was little more than a formality. However, two major terrorist attacks in Manchester and London have turned the political landscape upside down, and May’s comfortable lead in the polls has largely evaporated just three days before the vote on Thursday. The latest YouGov poll predicts that May’s Conservatives will fall just short of a majority. If this happens, May will have a much more difficult job negotiating Britain’s departure from the European Union, and the pound could drop sharply. Meanwhile, the economy appears to be slowing down, and the opposition parties will be hoping to gain seats at May’s expense, appealing to an electorate which is greatly concerned about the economy as well as the deteriorating security situation. Traders should be prepared for volatility from the pound this week.

GBP Remains Vulnerable Ahead of Next Week’s Vote

The Federal Reserve holds its policy meeting on June 14, and the odds of a quarter-point increase continue to climb. According to the CME Group, the odds of a hike have climbed to 96%, up from 88% just a week ago. The markets have priced in a June move, and a dismal Nonfarm Payroll report has failed to put a dent in market confidence in a June rate hike. Traders should note that ahead of the March hike, the odds of a rate hike were also close to 100%, and the dollar actually lost ground after the Fed followed through with a quarter-point increase. An increase in interest rates represents a vote of confidence in the US economy, but the Fed continues to have some concerns. Inflation remains stubbornly low, despite a labor market that remains close to capacity. Fed policy makers are also scratching their heads over soft consumer spending, which has not kept pace with high levels of consumer confidence. As for additional rate hikes in the second half of 2017, the markets are skeptical, with the odds of a September rate hike at just 26%.

GBP/USD Fundamentals

Monday (June 5)

• 4:30 British Services PMI. Estimate 55.1. Actual 53.8
• 8:30 US Revised Nonfarm Productivity. Estimate -0.6%. Actual 0.0%
• 8:30 US Revised Unit Labor Costs. Estimate 3.0%. Actual 2.2%
• 9:45 US Final Services PMI. Estimate 54.1. Actual 53.6
• 10:00 US ISM Non-Manufacturing PMI. Estimate 57.1. Actual 56.9
• 10:00 US Factory Orders. Estimate -0.2%
• 19:01 British BRC Retail Sales Monitor

*All release times are EDT

*Key events are in bold

GBP/USD for Monday, June 5, 2017

GBP/USD June 5 at 12:10 EDT

Open: 1.2856 High: 1.2940 Low: 1.2855 Close: 1.2917

GBP/USD Technical

• GBP/USD was flat in the Asian session. The pair posted slight gains in the European session and has edged higher in North American trade
• 1.2865 is providing support
• 1.2946 is a weak resistance line

Further levels in both directions:

• Below: 1.2865, 1.2706, 1.2571 and 1.2401
• Above: 1.2946, 1.3058 and 1.3120
• Current range: 1.2865 to 1.2946

OANDA’s Open Positions Ratio

In then Monday session, GBP/USD ratio is showing short positions with a majority (64%). This is indicative of trader bias towards GBP/USD reversing directions and moving to lower 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.