The British pound/U.S. dollar (GBP/USD) currency pair suffered a double whammy on the last two days of last week, resulting in a 245-pip drop from the week’s high to the low. First, it was the Bank of England on Thursday, which came across as less hawkish than expected as only two members voted for a rate rise, followed by a surprisingly strong U.S. jobs report on Friday.
As the pound sold off and dollar enjoyed a long overdue oversold bounce, the GBP/USD crashed back toward the psychologically-important 1.30 handle again. At the start of this week, the cable has staged what so far is a mini recovery. Whether or not it will bounce back will depend at least partially on the outcome of this week’s key economic data from both sides of the pond. Unfortunately, traders will have to wait until the end of the week again before the data is published, so we could be facing a choppy, directionless, first half of the week as far as the cable is concerned.
UK’s latest official industrial data is due on Thursday. If manufacturing production were to fall again after its surprise 0.2% drop previously, then this may put more downward pressure on the pound given the current downbeat sentiment. In the US, the Producer Price Index (Thursday) and Consumer Price Index (Friday) measures of inflation will be key as far the Fed and dollar are concerned. If inflation were to fall then the greenback could potentially lose its NFP-inspired gains. On the other hand, if inflation turns out to be hotter-than-expected then the dollar could extend its rebound, possibly sending the cable back below 1.30 handle.
For now, though, one has to treat Friday’s better-than-expected jobs report as an outlier given the overall weakness in U.S. data of late. If the dollar were to make a more meaningful comeback, we will need to see more evidence that the economy is on a sustainable path of growth and further acceleration in inflation. Consequently, I would not be surprised if the GBP/USD were to climb higher from its current levels until at least Thursday.
The area around 1.3000-1.3050 was resistance throughout the months of May and June. In July, the cable cleared this hurdle. Now, price is re-testing this area after that breakout. If the GBP/USD holds above here then this would bode well for the longer term trend. However, if the GBP/USD drifts below 1.30, then the short-term bias would turn bearish until we reclaim this level or there is a bullish formation at some lower support level. Last month’s low was at 1.2810/12 area.
So, any sustainable move below this level would be a real blow to bullish position traders. In terms of resistance, 1.3115 and 1.3190 are now among the key short-term hurdles to watch going forward. These levels were previously support. But if we eventually clear these levels and move above last month’s close at around 1.3200 area, then we may see some range expansion towards the previous resistance at 1.3450 or even higher.