GBP/USD: Profit Taken On GBP Rally, Very Short-Term Outlook Is Uncertain
Growth Aces | Apr 19, 2017 06:19AM ET
GBP/USD: Profit taken on GBP rally yesterday, very short-term outlook is uncertain
Macroeconomic overview: The pound's almost 4-cent surge, half of it in U.S. trading time, in the previous session, cleared out a large portion of the record bearish bets against the currency that have dominated trading since the Brexit referendum last June.
British Prime Minister Theresa May said on Wednesday that holding an early election on June 8 rather than waiting until 2020 would avert a situation where she would face a crunch time in EU talks and a domestic election at the same time.
Under the planned timetable, Britain is expected to formally leave the European Union in March 2019. The early election in June means May will not have to face the voters again until 2022, giving her a wider margin of manoeuvre at the tail end of the Brexit talks.
The prospect of a stronger majority for prime minister Theresa May, who leads the opposition Labour Party by 20 clear points in opinion polls, has spurred hope that will lay the ground for a slower, more orderly departure from the European Union after 2019.
Weak U.S. economic data also pushed down U.S. Treasury yields and weighed on the dollar yesterday. U.S. homebuilding fell in March after unseasonably mild weather buoyed activity in February and manufacturing output dropped for the first time in seven months, further indications that economic growth braked sharply in the first quarter.
Housing starts decreased 6.8% to a seasonally adjusted annual rate of 1.22 million units as the construction of single-family homes in the Midwest recorded its biggest decline in three years, the Commerce Department said. The market had forecast homebuilding falling to a 1.25 million-unit pace last month. Housing starts were up 9.2% compared to March 2016.
In a separate report, the Fed said manufacturing production dropped 0.4% in March, weighed down by a 3.0% decline in the output of motor vehicles and parts. That was the first and biggest decline in factory production since last August. The return of cold temperatures, however, resulted in a record 8.6% surge in utilities output, helping to lift industrial production 0.5% last month.
Reports on consumer and construction spending as well as inventory investment suggest the economy slowed sharply in the first quarter after gross domestic product increased at a 2.1% annualized rate in the fourth quarter of 2016. The Atlanta Fed is currently forecasting GDP rising at a 0.5% rate in the first three months of the year, which would be the weakest performance in three years.
Despite weaker U.S. macroeconomic data traders remain cautious on backing more GBP/USD gains into a weekend liable to dominated by the first round of French elections. French opinion polls show far-right leader Marine Le Pen and centrist Emmanuel Macron qualifying next Sunday for the May 7 run-off, but the gap with conservative Francois Fillon and far-leftist Jean-Luc Melenchon has been tightening.
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Technical analysis: We see consolidation below Tuesday’s 1.2908 peak. The pair holds above the top of the 30-day upper Bollinger at 1.2753 and the 200-day moving average at 1.2623, but we could see some adjustment back to these levels. The rise broke a long-term fibo at 1.2840 (38.2% of 1.5022-1.1491 fall) and the weekly cloud base.
Short-term signal: We took profit on GBP/USD long opened in yesterday’s Market Overview. We will consider another long position soon, but now we stay sideways as very short-term outlook looks uncertain and the volatility may be elevated.
Long-term outlook: The political issues will still play a key role and the volatility may be high. But we think that the upward GBP/USD move may be continued in the long term.
EUR/USD: Eurozone core inflation revised up
Macroeconomic overview: Eurostat confirmed inflation in March in the Eurozone slowed down to 1.5% yoy from a four-year high of 2.0% recorded in February.
But core inflation, which excludes volatile prices of energy and unprocessed food and which the European Central Bank monitors closely, was revised up to 0.8% yoy in March from an earlier estimate of 0.7%. The core figure remained, however, lower than the 0.9% recorded in February.
The revised core data may slightly strengthen the hand of those who support winding down the ECB monetary stimulus, although inflation remains below the central bank's target of inflation close but below 2% over the medium term.
Kansas City Fed President Esther George said planned fiscal stimulus from U.S. President Donald Trump and the Republican-controlled Congress could pose an "upside risk" to the U.S. economy, adding she is not yet forecasting that it will materialize. She also said the Fed does not target a foreign-exchange rate for the USD, a week after Trump said in published remarks that the currency was "getting too strong."
Technical analysis: The EUR/USD is retracing the March-April 1.0905-1.0570 drop. The 50% fibo is at 1.0738, just 2 pips shy of today’s top. The daily kijun is also by there and a break opens up further gains. The 1.0777 (61.8% fibo) and 1.0905 (March’s peak) are bulls’ objectives now.
Short-term signal: We have opened EUR/USD long at 1.0716 encouraged by technical analysis. The risk for this position comes from French elections on Sunday.
Long-term outlook: Bullish
USD/CAD: loonie hit by geopolitical worries and cheaper oil
Macroeconomic overview: The CAD fell to a more than one-week low against a broadly weaker USD on Tuesday as oil prices slipped and bond yields fell.
Commodity currencies are in defensive as investors are also nervous about tensions over North Korea, which failed to launch a ballistic missile over the weekend. Another source of uncertainty is French voting this weekend. French voters will go to the polls on Sunday in a first round that appears to be a tight four-way race led by a centrist and a far-right candidate.
Oil prices fell on Tuesday, as bearish positions were fueled by a U.S. government report which said shale oil output in May was expected to post the biggest monthly increase in more than two years.
The oil market has been caught in a tug-of-war, with OPEC production cuts supporting prices while signs of rising U.S. production have pressured crude on concerns about a glut. On Tuesday, U.S. West Texas Intermediate crude touched a low of USD 52.10 before bouncing on suggestions that Saudi Arabia is holding crude off the market.
OPEC Secretary-General Mohammad Barkindo said on today that all oil producers taking part in a supply-cut pact are committed to bringing global inventories down to the industry's five year average and restoring stability to the market.
In a speech that did not discuss monetary policy, a senior Bank of Canada official Carolyn Wilkins said new technologies could help boost Canada's flagging productivity and income growth, but could also widen income inequality as some workers benefit from automation and others are hurt by it.
Technical analysis: A break of 50% fibo of January-March rise last week was a false signal. The USD/CAD recovered and is close to April’s high at 1.3455 now. A close above this resistance level will open the way to March’s high at 1.3534.
Short-term signal: Flat
Long-term outlook: Bearish
Source: GrowthAces.com - your daily forex trading strategies newsletter
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