GBP/USD – Pound Hugs 1.22, Shrugs off Soft British GDP

GBP/USD is showing limited movement on Thursday, continuing the lack of movement which has marked the pair throughout the week. In the North American session, the pair is trading just below the 1.22 line. On the release front, British Preliminary GDP climbed 0.3 percent, short of the forecast of 0.5 percent. CBI Realized Sales surprised the markets with a reading of 21 points, crushing the estimate of 2 points. In the US, Thursday’s releases were positive. Core Durable Goods Orders improved in September with a gain of 0.2%, matching the forecast. Unemployment Claims edged down to 258 thousand, below the estimate of 261 thousand. As well, Pending Home Sales rebounded with a strong gain of 1.5%, above the estimate of 1.2%.

Britain’s economy grew in the third quarter, although the 0.3 percent gain was short of the estimate. Still, the markets appear relieved that the UK appears to have escaped significant economic damage in the period subsequent to the Brexit vote in June. The relief in the markets was underscored by the pound, which barely reacted to the GDP release. The British electorate’s decision in June to leave the European Union sent shock waves across the markets, which are still nervous about fallout from the vote, as Britain and the EU will have to sit down and negotiate an orderly departure. TThe markets will shift focus to the BoE’s policy meeting next week, as analysts continue to look for clues as to whether the bank will lower rates for the second time in four months. Higher inflation in recent months and a generally steady economy means that a November rate cut is far from a done deal.

The pound dipped below the 1.21 line on Tuesday, but recovered after testimony from BoE Governor Mark Carney. The BoE head testified before the House of Lord Economics Affair Committee. Carney, who back in June warned against Britain voting to exit the European Union, said that market fears about fallout from Brexit were “mistaken”. Carney noted that the inflationary impact created by the pound’s descent since June could encourage him to vote against further interest rate cuts in November. As for his view of the pound’s continuing slide, Carney kept his cards close to his chest. He noted that the BoE would not be “indifferent” to the significantly lower exchange rate. The bank lowered rates by a quarter-point in August and broadly hinted at further cuts at its September meeting. However, inflation levels have since moved higher and the economy has not shown signs of serious strain from Brexit. This means that a November cut is on the table, but should not be considered a done deal.

The markets are confident that the Fed will press the rate trigger in December, with a hike priced in at 72 percent by CME Fed Watch. The prospect of a US rate hike for the first time in a year has bolstered the US dollar against its rivals. The US economy remains strong, buoyed by a labor market that is close to capacity, with unemployment at a healthy 5.0%. Inflation levels remain low and are unlikely to show much improvement in the next few months. Although the Fed would prefer stronger inflation, other economic indicators remain strong enough such that the lack of inflation is unlikely to be the critical factor in the Fed rate decision. The Fed will also hold a policy meeting in early November, but is unlikely to make any rate moves just before the US presidential election.

GBP/USD Fundamentals

Thursday (October 27)

• 4:30 British Preliminary GDP. Estimate 0.5%. Actual 0.3%
• 4:30 British Index of Services. Estimate 0.8%. Actual 0.8%
• 6:00 British CBI Realized Sales. Estimate -2. Actual 21
• 8:30 US Core Durable Goods Orders. Estimate 0.2%. Actual 0.2%
• 8:30 US Unemployment Claims. Estimate 261K. Actual 258K
• 8:30 US Durable Goods Orders. Estimate 0.1%. Actual -0.1%. 
• 10:00 US Pending Home Sales. Estimate 1.2%. Actual 1.5%
• 10:30 US Natural Gas Storage. Estimate 71B

Upcoming New Events

Friday (October 28)

• 8:30 US Advance GDP. Estimate 2.5%
• 10:00 US Revised UoM Consumer Sentiment. Estimate 88.2

*All release times are EDT

* Key events are in bold

GBP/USD for Thursday, October 27, 2016

GBP/USD October 27 at 10:20 EDT

Open: 1.2235 High: 1.2272 Low: 1.2179 Close: 1.2192

GBP/USD Technical

• GBP/USD was flat in the Asian session. The pair posted considerable gains in European trade but has retracted and is dropping sharply in the North American session
• 1.2120 is providing support
• There is resistance at 1.2447

Further levels in both directions:

• Below: 1.2120, 1.1954 and 1.1844
• Above: 1.2447, 1.2525 and 1.2612
• Current range: 1.2120 to 1.2447

OANDA’s Open Positions Ratio

GBP/USD ratio is unchanged in the Thursday session, consistent with the lack of movement of GBP/USD. Long positions command a strong majority (60%), indicative of trader bias towards GBP/USD continuing to move higher.

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.