GBP/USD: Channel Resistance Increases Downside Risks

Pound support has started to wane as growth concerns have started to replace the optimism generated by the emergency budget.  The austerity measures have temporarily erased concerns that the country could lose its AAA credit rating. Markets have started to consider the impact on growth from the reduction in government spending which could become a weighing factor for the Pound. However, we have seen dollar bulls run to the sidelines as weakening fundamentals has increased the risks that the world’s largest economy could stagnate as it struggles to create jobs. June’s Non-Farm payroll report showed a job loss of 125,000 as the government reduced let go census workers. Although the private sector added 83,000 new hires, expectations of 113,000 were missed and average hourly earnings unexpectedly declined by 0.1%. Regardless, the U.S. growth outlook remains brighter and the dollar could benefit if broader concerns heighten resulting in a flight to safety. The GBP/USD has been in a descending channel and with price action currently testing the upper bound a case can be made for a retracement. Additionally, the 38.2% Fibonacci extension of the 1.6878-1.4230 decline at 1.5241 is a significant resistance level and could inspire a reversal. 

Levels to Watch:
-Range Top:  1.5275 (Trend, Fibo)
-Range Bottom: 1.4000 (Trend, Psychological)

Suggested Strategy

• Short: Place an entry at 1.5250- above Fibo resistance 
• Stop: Set the stop to 1.5400-150 pips in risk 
• Target: The first target is 1.4873-7/1 low

Trading Tip – Current consolidation could be a result of the U.S. Independence Day holiday volume but considering that we are seeing volatility in other pairs, it could be a sign that the pair is at a point of inflection. However, traders may want to wait till after the Holiday before entering into a position as we could see false breakouts on the thin trading volume. Nevertheless, the bullish rally may have already come to an end and a reversal could come become our entry level is hit. A move back below 1.500 would be another potential trigger for a short position with downside potential to 1.45000. 

Event Risk for U.K. and U.S.

U.K. – A BoE rate decision headlines a week of significant event risk for the pound. Policy markets are expected to remain on hold but have been more hawkish in their rhetoric. The central bank doesn’t typically issue a statement following no action which is the most likely scenario in this case. The purchaser’s mangers index reading for the service industry could be a more market moving event for the pound as the sector accounts for 70% of GDP. Economists are predicting a slight contraction from 55.4 to 55.0 as domestic growth remains resilient. However, a larger reduction in activity ahead of the cuts in government spending could fuel growth concerns and sink the pound.

U.S. – The U.S. will see its own service sector indicator cross the wires which should garner focus following the disappointing manufacturing and labor reports. Market participants will look for further clues that the U.S. economy is beginning to stagnate, which could spark a broader flight to safety creating dollar support or send investors to greener pastures increasing current bearish greenback sentiment.