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GBPUSD Losses to Continue on UK Political Risks

GBPUSD Losses to Continue on UK Political Risks

Martin Essex, MSTA, Analyst

GBP Talking Points:

- GBPUSD fell back Tuesday and Wednesday, and those losses look set to extend near-term.

- UK Prime Minister Theresa May has lost authority with a clumsy cabinet reshuffle while weak pay growth appears to be curbing household spending.

- Data released Wednesday showed the UK industrial sector performing strongly but weakness in both construction and overseas trade.

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GBPUSD undermined by political risk

GBPUSD has slipped back in recent days and those losses could well continue near-term after a cabinet reshuffle by UK Prime Minister Theresa May that was widely seen as mishandled alongside indications that falling real incomes are hurting the consumption component of UK GDP.

GBPUSD Price Chart 15’ Timeframe (January 9, 2018 – January 10, 2018)

GBPUSD Losses to Continue on UK Political Risks

Chart by IG

This week, May has revealed the new members of her cabinet and a number of appointments to mid-ranking ministerial posts. However, at least one cabinet minister refused to move, another quit in protest at losing her job and a third stepped down for health reasons. The process was seen as further weakening May’s authority.

GBPUSD is also likely to be affected by a lack of progress in the Brexit negotiations, a bounce in the US Dollar over the past few days and indications that, as inflation grows faster than incomes, UK consumers are spending less on non-food goods in the shops. GBP would also suffer if investors’ appetite for risk reduces, as signs suggest it might soon.

UK retail spending under threat

This week several UK retailers have announced their Christmas trading updates and the picture so far has been mixed. Among them, shares in both Debenhams and Mothercare tumbled on news of disappointing sales. By contrast, Next exceeded expectations and Sainsbury’s profits were boosted by a “record” Christmas week.

Overall, the British Retail Consortium reported that UK shoppers cut back on almost everything other than food in the last three months of 2017, leading to the biggest fall in non-grocery spending since 2009. The UK Visa Consumer Spending Index, published Monday, signaled a steep fall in household spending in December.

UK data paint a mixed picture

Consumption aside, a batch of data released Wednesday showed industrial production and manufacturing output growing by more than expected in November. However, the impact was offset by lower than predicted construction output month/month; three months/three months it suffered the largest fall since August 2012.

Trade figures released at the same time showed the largest goods trade deficit for five months and that the total trade deficit in goods and services was also the widest in five months, sending GBPUSD sharply lower.

GBPUSD technical levels to watch

Technically, there is now resistance around 1.36, hit by the pair on January 2 and the following day, and also close to 1.3660, the high reached last September. On the downside, the key area of support is 1.33, where GBPUSD traded in mid-December.

Meanwhile, IG Client Sentiment datashow 37.7% of traders are net-long GBPUSD, with the ratio of traders short to long at 1.66 to 1. In fact, traders have remained net-short since December 28, when GBPUSD traded near 1.33732; the price has moved 1.1% higher since then. The number of traders net-long is 9.4% higher than yesterday and 7.1% higher from last week, while the number of traders net-short is 1.7% lower than yesterday and 1.2% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD may rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that GBPUSD may weaken further despite the fact traders remain net-short.

--- 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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