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Big Red Flags for GBP/USD Bulls

Big Red Flags for GBP/USD Bulls

Boris Schlossberg, Technical Strategist

UK trade and industrial production fell far short of estimates today, calling into question the strength and sustainability of the UK recovery and sending GBPUSD quickly below the 1.60 support level.

The British pound (GBP) was crushed today in morning London dealing after both the UK trade balance data and industrial production numbers missed their mark, signaling that the UK manufacturing sector may be starting to slow. The news sent GBPUSD below the key 1.6000 support level.

Both UK manufacturing and Industrial production badly missed their consensus estimates, with the former printing at -1.2% versus 0.3% expected and the latter at -1.1% versus 0.2% forecast. These were the worst readings in more than a year, suggesting that Q3 GDP growth may be hampered by the manufacturing sector. Declines were led by pharmaceuticals, computer electronics, and food and beverage output, according to the Office for National Statistics (ONS).

The UK economy has been a shining star in the G7 universe this quarter, as it has produced upside surprises in almost every economic report, suggesting that growth was likely to rebound strongly in the second half of this year.

Indeed, just yesterday, the International Monetary Fund (IMF) raised its forecasts for the UK by more than any other G7 nation. However, today’s news shows that the rebound in the UK manufacturing sector may have hit a brick wall. That, along with the recent slowdown in the PMI indices, may signal that the UK recovery may have peaked during the summer months.

As a result, tomorrow's monthly Bank of England (BoE) monetary policy committee meeting may prove especially important for the currency markets. UK monetary policymakers have been decidedly dovish, even in the face of improving economic data, and have actually come under criticism for being too accommodative. However, today's data shows that the caution may have been warranted, and if they continue to assume a dovish posture, GBPUSD could weaken further and slip below the 1.5900 level as this week progresses.

FOMC Minutes to Play Second Fiddle

Elsewhere, the economic calendar remains quiet, but the US dollar (USD) saw a boost early today on the back of reports that President Obama will nominate Janet Yellen as the next Federal Reserve Chairman later today.

Initially, the greenback weakened on the premise that Yellen is a well-known dove and likely to maintain the current level of quantitative easing (QE) for the foreseeable future. However, given the current political stalemate over the US budget, the certainty over monetary policy ultimately proved positive for the dollar, which rallied against both the euro (EUR) and Japanese yen (JPY).

In North America today, only the most recent Federal Open Market Committee (FOMC) meeting minutes are scheduled for release, but with the Yellen nomination expected to follow, their importance may be diminished.

The bigger focus will once again remain on the political posturing in Washington. If the markets begin to perceive some sort of resolution upcoming, the dollar could rally further, with EURUSD testing the 1.3500 level, while USDJPY tries to climb above 97.50 as the day wears on.

By Boris Schossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.