Pound Shrugs Off Strong GDP
MarketPulse | Aug 15, 2014 07:46AM ET
The pound is stable on Friday, as GBP/USD continues to trade in the high-1.66 range. In economic news, British GDP posted a strong estimate of 0.8% in Q2. In the US, it's a busy day on the event calendar, led by two key releases on the calendar - PPI and UoM Consumer Sentiment. The markets are bracing for a soft PPI, while Consumer Sentiment is expected to post another strong reading.
The pound has taken a tumble against the US dollar, shedding about 200 points in the past two weeks. GBP/USD didn't show any improvement on Friday, despite the fact that GDP rose 0.8% in Q2, matching the forecast. Year-on-year, the economy expanded at a rate of 3.2%, edging above the estimate of 3.1%. However, the markets are more preoccupied with the BOE's dampening speculation about a rate increase, which has weighed on the pound.
On Wednesday, the BOE Inflation Report lowered the forecast for wage growth in the UK. The central bank said that it expected wages to rise in Q4 by just .25%, compared to the 2.5% forecast in May. This has caused the markets to scale back expectations of a rate increase anytime soon, and the pound dropped sharply as a result. With the British economy growing and unemployment falling, speculation was rampant that a rate hike was possibly around the corner. However, the Achilles heel in this view has been weak wage growth, underscored by the Average Earnings Index, which has dropped sharply in recent readings. In July, the indicator came in at -0.2%, its first decline in over five years. BOE Governor Mark Carney added salt to the wound at a press conference on Wednesday, when he stated that any interest rate would be "slow and small". The result was a backlash from the markets as the pound shed over 100 points.
In the US, Unemployment Claims were higher than expected. The indicator climbed to 311 thousand, marking a six-week high. The estimate stood at 307 thousand. Employment indicators are being closely scrutinized by analysts, as the strength of the labor market is one of the most important factors influencing the Federal Reserve regarding the timing of an interest rate hike. A rate increase is expected by mid-2015, but stronger economic data, especially on the employment front, could hasten a move by the Fed. Earlier in the week, JOLTS Job Openings hit its highest level in 13 years, although it too missed expectations.
Meanwhile, US retail sales data disappointed on Wednesday. Retail Sales dropped to a flat 0.0% last month, its weakest showing since January. The estimate stood at 0.2%. Core Retail Sales wasn't much better, posting a gain of 0.1%, down from 0.4% a month earlier. This was well short of the estimate of 0.4%. Retail sales are the primary gauge of consumer spending, and July's weak numbers points to a slow start to the third quarter. Although unemployment levels have dropped, this has not translated into stronger consumer spending, a key component of economic growth.
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- GBP/USD 1.6689 H: 1.6697 L: 1.6658
GBP/USD Technicals
| S3 | S2 | S1 | R1 | R2 | R3 |
| 1.6382 | 1.6484 | 1.6565 | 1.6700 | 1.6825 | 1.6920 |
- GBP/USD has been steady in the Asian and European sessions. The pair touched a high of 1.6701 in early in European trading.
- 1.6565 continues to provide strong support.
- On the upside, 1.67 is under strong pressure and was breached earlier. 1.6825 is stronger.
- Current range: 1.6565 to 1.6700.
Further levels in both directions:
- Below: 1.6565, 1.6484, 1.6382 and 1.6251
- Above: 1.67, 1.6825, 1.6920, 1.7000 and 1.7183
OANDA's Open Positions Ratio
GBP/USD is pointing to small gains in long positions in Friday trade. This is consistent with the pair's movement, as the pound has recorded very small gains. The ratio currently has a large majority of long positions, indicative trader bias towards the pound moving to higher ground.
GBP/USD Fundamentals
- 8:30 British Second Estimate GDP. Estimate 0.8%. Actual 0.8%.
- 8:30 British Index of Services. Estimate 1.0%. Actual 1.0%.
- 12:30 US PPI. Estimate 0.1%.
- 12:30 US Core PPI. Estimate 0.2%.
- 12:30 US Empire State Manufacturing Index. Estimate 20.3 points.
- 13:00 US TIC Long-Term Purchases. Estimate 27.3B points.
- 12:30 US Empire State Manufacturing Index. Estimate 20.3 points.
- 13:00 US TIC Long-Term Purchases. Estimate 27.3B.
- 13:15 US Capacity Utilization Rate. Estimate 79.2%.
- 13:15 US Industrial Production. Estimate 0.3%.
- 13:55 US Preliminary UoM Consumer Sentiment. Estimate 82.7 points.
- 13:55 US Preliminary UoM Inflation Expectations.
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