08.08.201708:32 Forex Analysis & Reviews: The pound plays poker

Long-term review

The British pound could not hold onto its levels of 10-month highs against the US dollar and the sterling tumbled down due to the decline in the forecasts for the growth of the UK economy by the Bank of England, the moderately "dovish" rhetoric of Mark Carney and strong data on the US labor market. The futures market does not believe in hiking the repo rate in May 2019, while the increase in the likelihood of tightening the Fed's monetary policy in December from 44% to 47% has become the basis for a GBP/USD bearish attack.

Impressed with better-than-expected data on business activity in the service sector, the sterling super-thursday for its health: the index accelerated from 53.4 to 53.8, which was a pleasant surprise after the purchasing managers index dropped to an 11-month low and revived hopes for a gradual recovery in the UK economy.

Dynamics of business activity in Britain

Exchange Rates 08.08.2017 analysis

Source: Financial Times

Nevertheless, the Bank of England did not make the best out of the situation and reduced GDP growth forecasts from 1.9% to 1.7% in 2017 and from 1.7% to 1.6% in 2018. What more needs to be done if the path of the indicator has significant discrepancies with earlier estimates?

Forecasts for GDP growth

Exchange Rates 08.08.2017 analysis

Source: Financial Times.

The Monetary Policy Committee left the REPO rate at 0.25% with six votes to two. Mark Carney said that the Central Bank needs to work closely when dealing with extreme conditions, inflation remains a priority, and rates can be raised earlier than the market expects. If you add to this speech the following comments by Ben Broadbent on the possibility of a monetary tightening, you might think that the BoE acted as a "hawk". In fact, investors are well aware of the benefits of a strong pound, which blocks the growth of inflation. In this regard, they start to ignore the comments on hiking rates, comparing them with the player's poker bluff.

Furthermore, US employment data added pressure on the position for "bulls" of the GBP/USD. In June, non-farm payrolls increased by 209,000, unemployment dropped to 4.3%, and the average salary accelerated at the fastest pace since autumn 2016. The US dollar recorded modest gains. According to Nordea Markets, even amid further improvements in macroeconomic data, it would be unlikely that they will be able to develop them in the United States. Blame the "American" Damocles sword factor of the public debt ceiling for everything. Until the end of September to the middle of October, it is unlikely that the yield of treasury bonds will increase substantially.

As for the pound, the gradual process of brexit negotiations, risks of slowing down industrial production as well as concerns with attracting investments in financial markets and in the UK economy, will paint the future with shades of grey.

Technically, after implementing the "Bat" and "Three Movements" patterns, the GBP/USD pair fell to support at 1.303. Here is the lower limit of the ascending trading channel. A successful attack will allow the "bears" to rely on the development of correction in the direction of 1,285-1,29. On the contrary, the exit will lay a foundation for consolidation.

GBP/USD, daily chart

Exchange Rates 08.08.2017 analysis

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Marek Petkovich,
Analytical expert
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