short-term outlook

Technical Market Outlook: The GBP/USD pair has rebounced from the lows seen at the level of 1.2690 and is heading higher towards the swing high located at 1.2846. The 50 MA will provide the dynamic resistance for bulls around the level of 1.2804.   The momentum is strong and positive, so the short-term outlook for GBP remains bullish. The intraday technical support is seen at the level of 1.2738 and 1.2690.    

EUR/USD As a result of Friday, the euro grew by 76 points after reacting to moderately positive US employment data. The unemployment rate slipped to 3.6% from 3.7% in May, although Non-Farms showed that the US economy added 209,000 jobs in June 2023, following a downwardly revised 306,000 in May, and below market forecasts of 225,000. This was reflected to some extent in the broad unemployment index – it rose from 6.7% to 6.9%. The overall labor force participation rate was unchanged for the fourth consecutive month at 62.6%, and there is room for growth to around 62.8-62.9%, where this share of the active population was quite stable in 2015/19. Therefore, the labor market is not yet saturated, even the average hourly earnings for all employees rose by 0.4% in June.   If we consider Friday's data in conjunction with Thursday's ADP data, the picture seems favorable for dollar growth. In fact, after a little hesitation with the release of data, the dollar strengthened, but as on Thursday, it was speculatively bought out. The trading volume was less compared to Thursday. And this could mean that the resistance of dollar buyers has been broken, or the bulls themselves are close to completing such a two-day speculative operation. In the first case, the euro's growth will extend at least to 1.1028 (and then the price will diverge from the oscillator on the daily chart), or higher, to 1.1085, or, in the second case, the euro will still grow a little for technical work out of the upper band of the price channel to 1.0980 and will turn to depreciation in the medium-term.     Whatever the case may be, buying the EUR/USD pair right now is risky, we are still waiting for the euro to turn to a 4-5 figure drop, we just have to wait for this turn to form. On the four-hour chart, the price is rising above the balance and MACD indicator lines, the Marlin oscillator is in a position to grow, we have an uptrend in the short-term.  

EU and China Service PMIs drive global growth concerns UK Final Services PMI revised higher but downward trend remains Fed’s Waller (hawk) says “There is nothing that is saying we need to do anything imminent anytime soon.” GBP/USD (daily chart) as of Tuesday (9/5/2023) has made a quick and strong breakdown below multiple support levels, indicating a potential bearish breakdown could target the 38.2% Fibonacci level, which resides at 1.2072.  A bearish near-term outlook has been in place over the past month on the decline of both the longstanding bullish support trendline that was in place since last October and below the 50-day SMA.  Price action is currently trading below the 100-day SMA and if downside continues, could target the 200-day SMA at 1.2421. Upward UK PMI revisions The British pound pared losses this morning after UK services data came in better-than expected, outperforming what came from the Eurozone and following the downbeat readings from China.  The UK service sector is still in contraction territory, standing at 49.5, but it did buck the trend we saw with the rest of Europe. While the service reading was revised higher from a preliminary reading of 48.7, the downward trend that started in April remains firmly in place. Central bank expectations Slowing global growth concerns are sending rate hike expectations lower across the board.  Fed fund futures now are only pricing in a 6.8% chance of a rate hike at the September 20th meeting and the November 1st odds are currently at 37.2%. The ECB rate hike odds for the September 14th meeting are now at 25.5% and the October 26th meeting has a 25.8% expectation for a rate increase. Both the BOE and Riksbank are the only central banks (advanced economies) that are close to fully pricing in rate increases at their respective September policy decisions.  The BOE appears poised to deliver two quarter-point rate increases as financial markets price a 97.6% chance of an increase at the September 21st meeting. Short-term drivers The GBP/USD pair reacted positively to Fed’s Waller’s comment that the data doesn’t say we need to do anything imminent.  Waller is considered one of the more hawkish Fed members, so this comment could help convince markets that the Fed is likely done raising rates. It appears that global sentiment will likely be the primary driver here for the British pound, but dollar weakness could emerge if more Fed officials signal the end of tightening has arrived.  If the UK labor market starts to loosen and household spending softens, BOE rate hike odds could come down and that could also fuel further downward pressure on sterling.  

GBP: Eyes on inflation this week This week, the focus in the UK will be on CPI data for November out on Wednesday. As usual, we'll be paying attention to services inflation, which we estimate to come in at 6.6%, showing little near-term progress. That may help markets ease some of the rate cut bets in the UK and help the pound. Markets are still pricing in four rate cuts by the Bank of England this week despite the Bank’s attempt to discourage dovish bets via in-meeting communication. We still think services inflation in the UK will ease to around 4% by next summer, allowing the BoE to start cutting, but the pound has decent room to benefit from some hawkish repricing in the short run. Last week’s 0.8550 lows in EUR/GBP may well be retested by the end of December.