Chapter 32 09/11 GBPUSD: Correction Won't Trigger Sustained Rebound, Focus on Shorting at Highs
Summary: Over the past week, the GBPUSD continued its descent as robust US economic data fueled bets on further Fed rate hikes. Although the asset saw a significant correction early in the week, economic data from both the UK and the US may intensify market volatility.
Fundamentals
Early last week, the British pound saw some upward momentum against certain currencies due to optimistic market sentiment. However, these gains were eroded as concerns grew about the UK's economic prospects. As policy tightened further, the UK economy faced challenges, weakening the pound as risk aversion took hold.
Despite an upward revision in the UK Services Purchasing Managers' Index (PMI) on Tuesday, confirmation of a significant economic slowdown and contraction weighed on the pound, leading to trading volatility. Persistent concerns about the UK's outlook continued to exert significant pressure on the pound throughout the week, and dovish remarks from the Bank of England (BoE) on Wednesday led to a decline. BoE Governor Andrew Bailey stated that the tightening cycle of the Bank was nearing its end, shattering existing tightening expectations. These remarks continued to weigh on the pound into the weekend.
On the US dollar front, market sentiment was cautious on Monday due to the Labor Day holiday, leading to subdued trading conditions. However, market sentiment deteriorated the next day as weak economic data unsettled markets and investors. Subsequent surges in oil prices raised concerns about rising inflation, further dampening market sentiment.
Wednesday saw the US dollar rally as the latest US August ISM Services PMI was released, indicating the fastest expansion in economic activity in six months and increasing expectations of further Fed policy tightening.
Thursday brought further support for the US dollar as initial jobless claims fell, reflecting ongoing tightness in the labor market. However, Friday's trading was subdued for the US dollar due to a lack of data-driven factors, with market sentiment turning optimistic.
Looking ahead to this week, a series of impactful data releases is on the horizon. First, BoE Chief Economist Huw Pill is scheduled to deliver a speech on Monday. If Pill delivers hawkish remarks, the pound may strengthen against other currencies as investors bet on the BoE's further policy tightening.
Next up on Tuesday is the release of the latest unemployment rate and wage growth data. The unemployment rate for July is expected to rise to 4.3%, while wage growth is expected to slow down. If both sets of data align with predictions, the pound may struggle to find support, indicating that the BoE's tightening cycle may not need to continue.
On Wednesday, the latest UK GDP data will reflect economic activity in July. Currently, the market predicts a 0.3% contraction for the pound, and if this expectation holds, the GBPUSD could see a significant decline.
For the US dollar, there are several data releases this week. On Wednesday, the latest inflation data is expected to be published. Market expectations currently point to an overall inflation rate increase in August for the US, while the core Consumer Price Index (CPI) is expected to cool off. Core data may take precedence and potentially weaken the US dollar by indicating that inflation has peaked.
US retail sales data for August is scheduled for release on Thursday, with sales expected to slow down, which could weaken the US dollar.
Finally, the Michigan Consumer Sentiment Index (MCSI) for August is set to be released on Friday.
Technical Analysis
The GBPUSD pair continues to be in a new downtrend that started from the 1.2700 resistance area. Despite a significant correction during the Asian session on Monday, as previously analyzed, the asset entered a bearish zone after breaking below the 1.2550 support level.
Currently, the asset shows some positive signs as it finds support above the 100-hour SMA and just above 1.2480. The next resistance is located around 1.2580. An upside break above the 1.2580 level could push the asset toward 1.2655, and any further upside movement may open the door to testing the 1.2700 level.
On the downside, initial support is found near the 1.2480 area. The next major support level is at 1.2450. If it breaks below 1.2450, the asset may continue its downward trend, with the next key support located near the 1.2400 level. Any more losses might call for a test of the 1.2345 support level.
Overall, the significant correction on Monday moved the GBPUSD pair further away from the three-month low at 1.2445. Investors are now looking forward to key macroeconomic data from the UK and the US this week to seek new catalysts. In terms of trading strategy, considering the key resistance levels mentioned above, going short at highs is favored.
Trading Recommendations
Trading Direction: Short
Entry Price: 1.2520
Target Price: 1.2350
Stop Loss: 1.2685
Valid Until: 2023-09-25 23:55:00
Support: 1.2480, 1.2450, 1.2400
Resistance: 1.2580, 1.2655, 1.2685
