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GBP/USD: Is All the Bad News Now Priced In?

GBP/USD: Is All the Bad News Now Priced In?

2017-10-03 14:47:00
Martin Essex, MSTA, Analyst
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Talking Points

- GBP/USD fell further Tuesday on a poor UK construction PMI and a Brexit process in which the two sides seem further apart than ever.

- Yet UK inflation remains too high and an increase in interest rates remains likely later this year, suggesting a rally in the Pound could now be close.

What Does the Fourth Quarter Hold for the Pound, Equities, Oil and Other Key Markets? Find out here

GBP/USD has suffered a torrid two weeks, dropping back on a toxic mixture of poor UK economic data and a Brexit process in which the two sides, the UK and the EU, seem to be moving even further apart. Yet it is not impossible that all the bad news has now been priced in and that a rally is on the cards as a possible UK interest rate increase later this year comes closer as the Bank of England tackles above-target inflation.

Monday’s news that the purchasing managers’ index for the UK manufacturing sector fell by more than expected in September was followed Tuesday by news that the PMI for the construction sector not only missed expectations but dropped below the 50 mark separating expansion from contraction. That suggests a risk that Wednesday’s service-sector PMI, expected to be unchanged at 53.2, could also surprise to the downside.

As for Brexit, it is hard to see how the UK and the EU could possibly be further apart after the European Parliament adopted a resolution Tuesday that insufficient progress has been made to move on to the question of the future relationship between the two sides, as the UK wants. Meanwhile, the annual conference of the ruling UK Conservative Party has further highlighted the deep divisions within the Cabinet on how best to proceed on Brexit and the weak position of Prime Minister Theresa May.

For the Pound, this is a ghastly combination. Yet the latest UK inflation data showed a rise from 2.6% to 2.9%, the joint highest for more than five years and still further away from the official 2% target. Bank of England Governor Mark Carney has hinted several times that the bank’s response could be to raise UK interest rates soon, perhaps as early as next month. That could lift the Pound as the November 2 announcement comes closer.

As far as the IG client sentiment data are concerned, there is currently no clear signal on GBP/USD, with long positions at 46% and shorts at 54%. Technically, GBP/USD has failed to climb above an important resistance line on the weekly chart dating from 2014, which is a negative development.

Chart: GBP/USD Weekly Timeframe (2013 to Date)

GBP/USD: Is All the Bad News Now Priced In?

Chart by IG

However, the daily chart shows no decisive break yet below either the August high at 1.3270 or the trendline connecting the August and September lows, currently at 1.3218.

Chart: GBP/USD Daily Timeframe (June 2017 to Date)

GBP/USD: Is All the Bad News Now Priced In?

Chart by IG

If both those levels are taken out decisively, the short-term picture will look poor for the pair. But longer-term there are good reasons fundamentally to believe that the worst might now be over.

--- 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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