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GBPUSD: A surprising casualty

29 July, 2014

By Jameel Ahmad, Chief Market Analyst at FXTM

It is difficult to understand how the GBPUSD has sharply transitioned from registering a new 5-year high (1.7189) to recording eight days of successive losses for the first time since May 2010. The pair declined by a further 50 pips and reached a six-week low on Tuesday after the latest UK Mortgage Approvals were stronger than expected. Bank of England (BoE) Governor, Mark Carney had previously expressed opinion that the UK housing sector posed one of the largest threats to the UK economy.

A major contributing factor behind the recent GBPUSD decline is not necessarily due to faltering UK economic optimism, but due to international geopolitical tensions attracting the attention of the financial markets. Over the past week, investors have been attracted to safe havens, such as the USD, and this has devalued the GBPUSD.

Looking at the Daily timeframe, as long as geopolitical tensions quieten down technical traders could now be observing an ideal time to look into this pair. Both the Stochastic Oscillator and RSI are each suggesting that the GBPUSD is oversold and looking at the historical correlation between these two momentum indicators, the price seems to quickly rebound after approaching the oversold boundaries. Additionally, the pair is now only a fractional distance away from a bullish trendline that has controlled the overall direction of the GBPUSD since November 2013. If the trendline is touched, it should either act as a dynamic support level or further support can be found at 1.6919.

In order for the GBPUSD to bounce back, the bulls need a reason to rally. Tomorrow afternoon, the US 2nd Quarter GDP release may provide an opportunity. It is currently expected that the US GDP will be announced at around 3%, but the markets will be keeping a very close eye on what proportion of the 1st quarter GDP contraction was recovered in the following quarter.

I remain unconvinced that the US economy recovered as much of the 2.9% Q1 contraction as currently expected. A large amount of the economic contraction was caused by reduced consumer expenditure and construction activity. Recent US consumer data can be considered soft, such as the past three Advance Retail Sales missing expectations, alongside average wage growth declining. This raises a threat that a proportion of the reduced consumer expenditure in Q1 (which reportedly accounts for 70% of the overall US GDP), might not have been recovered in Q2. In reference to the US construction sector, it is possible projects that were delayed during the atrocious winter weather period have since commenced, but only 6,000 construction jobs were created by the US economy in June. Furthermore, the US construction sector remains over 20% bellows its peak before the global financial crisis emerged.

If the US GDP does disappoint, this will likely bring some risk appetite back into the currency markets. It will also allow an opportunity for the GBPUSD to begin rebuilding some of the previous week’s lost momentum. Due to the UK economic calendar being light this week, exactly how the markets react to the US GDP release will likely determine the GBPUSD’s next move. In regards to the next noticeable economic release from the United Kingdom, RBS are currently suggesting that Friday’s Manufacturing PMI for June will be recorded at a yearly high.

If this is confirmed, we can expect the GBP bulls to wake up.

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