After a sharp slide, the pound has finally caught a bid today. While it is too early to suggest that a low has been hit, today’s rebound is certainly a welcome relief for the pound bulls. The British pound/U.S. dollar (GBP/USD) currency pair has ended a run of five consecutive losses, the GBP/JPY is up after falling six days in a row, while the euro/British pound (EUR/GBP) is back below 0.90 after a sharp four-day rally. Sterling’s rebound is therefore mainly because of profit-taking on the short trades that had been accumulated over the past week or so.
Clearly, some market participants have one eye on upcoming UK data while assessing the damage of a potential no-deal Brexit outcome on the UK economy. The latter is going to be a longer-term worry which means any short-term rallies in the pound could be short-lived, as it proved to be the case after the Bank of England’s rate hike last week.
Will the pound respond better to UK GDP than it did to BoE hike?
On Friday, the ONS will publish the latest growth figures for the UK economy. GDP is expected to have grown in the second quarter by 0.4% following a disappointing expansion of just 0.2% in Q1. The ONS will also publish the monthly GDP estimate at the same time, as well as UK trade figures, manufacturing production, industrial production and construction output. The UK data dump tomorrow morning at 9:30 BST should cause a spike in pound volatility. If the figures are overall weaker than expected then the pound could resume its slide. If the data turn out to be stronger then it will be interesting to see whether the pound bulls will be more determined this time around after the currency’s quick reversal post-BoE last week.
US CPI inflation numbers key focus for dollar
As far as the GBP/USD is concerned, there is also the other side of the equation to consider: the US dollar. That’s because we will also have the all-important US consumer inflation numbers in the afternoon which could move the greenback sharply. US CPI is expected to have risen 02% in July, taking the year-over-year rate to 3.0% from 2.9% previously. Core CPI is also seen rising 0.2% on the month with year-over-year rate expected to have remained unchanged at 2.3% last month. If inflation turns out to be hotter than expected then this should bode well for the dollar as it will further cement the Fed’s projected rate hike expectations. However, if CPI turns out to be weaker than expected then we could see the dollar take a tumble. This is because we think most of the positively for the dollar might be priced in by now, so it could fall more on data misses than rise on beats.
GBP/USD rebounds from key long-term support zone
From a technical point of view, the cable is currently trading near the lower end of its bearish channel around the long-term 61.8% Fibonacci retracement level just below the 1.29 handle. This implies that the sellers have been in firm control. It also means that there is now scope for a short squeeze rally toward the top of the channel should the bears further reduce their positions ahead of the above fundamental events. The long-term technical outlook would turn bullish when the cable breaks a previous high.
In this case, the most recent high is at 1.3175 which is now the line in the sand for us. A couple of short-term resistance levels to watch are around 1.2920/5 and 1.3095/3100, levels which were formerly support levels. Meanwhile, the next potential support below 1.2850 comes in at 1.2750.