Chapter 48 10/24 GBPUSD: Continue to Go Short at the Highs as the Recovery Momentum Fails to Meet Expectations
Abstract: During the early European session on Tuesday, the GBPUSD reversed after rising (testing) close to 1.2300 and fell below 1.2250. The sharp decline in the GBPUSD occurred after the comprehensive purchasing managers index (PMI) was below 50. The index outlines the signs that the private sector continues to shrink.
Fundamentals
The UK PMI manufacturing industry rose slightly, from 44.3 in October to 45.2. In contrast, the service industry declined slightly, hitting a nine-month low, but dropped slightly from 49.3 to 49.2. The comprehensive PMI rose slightly, from the previous 48.5 to 48.6.
Chris Williamson, Chief Business Economist at Standard & Poor's Global Market Intelligence, said that the UK is getting dangerously close to recessionary waters. Williamson emphasized that the combined effects of a rising cost of living, soaring interest rates, and reduced exports were to blame for the third consecutive month of falling output.
Although the current economic downturn is moderate, and the forecast implies that the quarterly GDP is only -0.1%, the cloud of economic uncertainty indicates that the future may be more difficult. He added: "Although the current economic recession is mild, the possibility of economic recession cannot be ruled out."
On the optimistic side, the cost pressures that had been evident earlier had begun to subside, partly as a result of weaker wage inflation and lower prices set by manufacturers. Nonetheless, the service sector continues to deal with inflation and has even seen a modest rise. This suggests that headline inflation is likely to continue to hover around 4% as the transition takes place early next year.
Market observation: Today, we have received various economic data from the UK, but none of them may affect the progress of the Bank of England (BOE) meeting next week. We hold the same view as the market expectations, and next week's BOE meeting will suspend interest rate hikes again. In October, the PMI of the service industry in the UK dropped from 49.3 to 49.2, the lowest level since January, and it was below the threshold of 50 for the third consecutive month. These data highlight the risk of economic recession and pose a dilemma for policymakers, especially considering the potential inflationary pressure caused by soaring oil prices.
Technical Analysis
The GBPUSD started strongly this week, setting the strongest continuous rise since mid-July. The rise in the past two trading days was confirmed by the low of 1.2089 last week and the bull breaking through the triangle consolidation pattern. It shows that the positive trend in the short term is reasonable.
Technical indicators are also in line with the uptrend, with the Relative Strength Index moving into the bullish zone above 50 and the MACD returning above the 0-axis. Similarly, the Stochastic Oscillator resumed its positive slope.
During the European session, the GBPUSD spiked to 1.2288 before pullback. The move was also influenced by a weaker USD, while technical factors were also at play. Also, the bearish outlook looks quite optimistic and the market has likewise come to massive selling levels. The GBPUSD lost upside momentum after the disappointing PMI release.
If the GBPUSD continues to see a bearish correction, the 2022 uptrend line could come into play again at 1.2150. If not, bears will try to touch the October low at 1.2036, a break of which could trigger a short move toward the downtrend from November 2021. The 1.1900-1.1925 range could be the next target.
Overall, although the GBPUSD gained ground on encouraging signals, it started to move sharply lower after rising to the 1.2288-1.2300 range. The range is the aligned position (strong resistance) of the 100-period SMA in the 4H timeframe and the 23.6% Fibonacci retracement of the latest uptrend. At the same time, the Relative Strength Index fell back to 50, indicating a lack of recovery momentum. It is recommended to go short at the highs.
Trading Recommendations
Trading direction: Short
Entry price: 1.2250
Target price: 1.1848
Stop loss: 1.2395
Deadline: 2023-11-06 23:55:00
Support: 1.2074, 1.2037, 1.2000
Resistance: 1.2169, 1.2203, 1.2250
