GBP: Outlook Improves Against Both USD and EUR

Talking Points:

• The likelihood of tighter monetary policy in both the US and the Euro-Zone has lessened in recent days, potentially helping the British Pound against both.
• Meanwhile, the latest round of Brexit talks has now ended, removing a possible banana skin.
• As for economic data, a relatively quiet week lies ahead.

Fundamental Forecast for GBP: Bullish

The British Pound had a much better week at the end of August. It rallied against the US Dollar both before and after Friday’s weaker-than-expected payrolls data, and it firmed against the Euro both before and after signs emerged that the European Central Bank may not announce a decision on reducing its monetary stimulus program for the Euro-Zone economy until October at the earliest because of the Euro’s strength.

At the same time, a press conference at the end of the latest round of Brexit talks was bitter and acrimonious but at least the negotiators are now taking time out so there’s a chance the Brexit headlines will be less confrontational.

Turning to the economic data, Friday’s purchasing managers’ index for the UK manufacturing sector was considerably stronger than expected, suggesting a better outlook for third-quarter economic growth and boosting the hawks’ case for higher UK interest rates.

The week ahead is another relatively quiet one for economic data but it will be interesting to see whether the construction and service-sector PMIs on Monday and Tuesday also come in better than expected ahead of Friday’s batch of official data on industrial production, construction output and international trade.

As for the technical picture, GBP/USD is looking healthier than it has for a while. If it can take out the June 8 high at 1.2982, it should reach the May and August highs around 1.3035 and perhaps even the July 18 high at 1.3122.

Chart: GBP/USD Daily Timeframe (April 19 – September 1, 2017)

Chart by IG

Turning to EUR/GBP, that has now broken down through the support line from the July 17 low and could fall as far as the support line from the May 10 low, currently at 0.9000.

Chart: EUR/GBP Daily Timeframe (April 19 – September 1, 2017)

Chart by IG

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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