GBP/USD – Pound Drops on BoE, Weak Construction PMI

GBP/USD has reversed directions and posted considerable losses in the Thursday session. In North American trade, the pair is trading just above the 1.2560. On the release front, it’s been a busy day in the UK. Construction PMI slipped to 52.2, missing the estimate of 53.9. The Bank of England held the benchmark rate at 0.25% and released its inflation report. In the US, Unemployment Claims dropped to 241 thousand, below the forecast of 251 thousand. US employment data will be in focus on Friday, as the US releases Nonfarm Payrolls, Average Hourly Earnings and the unemployment rate.

British PMIs, key gauges of economic strength, have been better than expected in recent months. However, December’s Construction PMI was unexpectedly soft, as the index slipped to 52.2, its weakest showing in five months. The focus then shifted to Bank of England, which made no changes to interest rates or asset-purchases. Interest rates have been pegged at 0.25% since August 2016 and asset purchases at 435 billion since July 2016. The BoE sharply raised its forecast for growth in 2017, from 1.4% to 2.0%. This is testament to the British economy which has performed much better than expected since the Brexit vote back in June. On the inflation front, BoE Governor Carney said that he expected inflation to reach the bank’s 2 percent target later this month. Still, the pound dropped, likely due to disappointment over Carney’s statement that the bank remained neutral regarding which way rates would go next. The BoE appears comfortable with low rates, despite stronger inflation due to the weaker pound and higher oil prices. Carney reiterated his concerns about Brexit, saying that Britain’s road out of Europe would be marked by “twists and turns”.

As expected, the Federal Reserve didn’t make any moves on Wednesday, leaving the benchmark interest rate at 0.50%. The markets were hoping to glean something from the rate statement, but the Fed didn’t have much to add. The statement was upbeat about the economy and said that inflation continues to move towards the Fed’s target of 2 percent. Analysts expect the Fed to raise rates two or three times in 2017, with the odds of a rate hike by June priced in 70%. However, Donald Trump remains an enigma, as his economic policy remains unclear – Trump has promised substantial fiscal spending and tax cuts, but hasn’t provided any details. Just a few months ago, a red-hot economy had led to the Fed loudly hinting at gradual rate increases in 2017. However, with the markets showing increasing uneasiness about the new Trump administration, the Fed will likely change gears and adopt a wait-and-see attitude, watching what bills Trump gets through Congress and how the economy responds.

Trump On, Trump Off, Fed an Onlooker

GBP/USD Fundamentals

Thursday (February 2)

• 4:30 British Construction PMI. Estimate 53.9. Actual 52.2
• 7:00 British BoE Inflation Report
• 7:00 MPC Official Bank Rate Votes. Estimate 0-0-9. Actual 0-0-9
• 7:00 BoE Monetary Policy Summary
• 7:00 BoE Official Bank Rate. Estimate 0.25%. Actual 0.25%
• 7:00 BoE Asset Purchase Facility. Estimate 435B. Actual 435B
• 7:00 MPC Asset Purchase Facility Votes. Estimate 0-0-9. Actual 0-0-9
• 7:30 BoE Governor Mark Carney Speech
• 7:30 US Challenger Job Cuts. Actual -38.8%
• 8:30 US Unemployment Claims. Estimate 251K. Actual 246K
• 8:30 US Preliminary Nonfarm Productivity. Estimate 1.0%. Actual 1.3%
• 8:30 US Preliminary Unit Labor Costs. Estimate 2.3%. Actual 1.7%
• 10:30 US Natural Gas Storage. Estimate -82B

Upcoming Key Releases

Friday (February 3)

• 4:30 British Services PMI. Estimate 55.8
• 8:30 US Average Hourly Earnings. Estimate 0.3%
• 8:30 US Nonfarm Employment Change. Estimate 170K
• 8:30 US Unemployment Rate. Estimate 4.7%
• 10:00 US ISM Nonfarm Manufacturing PMI. Estimate 57.0

*All release times are GMT

*Key events are in bold

GBP/USD for Thursday, February 2, 2017

GBP/USD Febuary 2 at 10:55 EST

Open: 1.2658 High: 1.2706 Low: 1.2534 Close: 1.2540

GBP/USD Technical

• GBP/USD was flat in the Asian session. The pair posted considerable losses in the European session and continues to head lower in North American trade
• 1.2471 is providing support
• 1.2579 has switched to a resistance role after strong losses by GBP/USD. It is a weak line

Further levels in both directions:

• Below: 1.2471, 1.2351 and 1.2272
• Above: 1.2579, 1.2674, 1.2775 and 1.2849
• Current range: 1.2471 to 1.2579

OANDA’s Open Positions Ratio

GBP/USD ratio is showing slight movement towards short positions. Currently, long positions command a majority (54%), indicative of trader bias towards GBP/USD reversing directions and moving upwards.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.