Pound Sterling Falls, Euro Follows Suit
InstaForex Group | Jul 06, 2022 04:41AM ET
Tuesday started with a substantial decline in the British pound. Worries over the looming global recession could have caused it, but this reason seems far-fetched. This threat is nothing new to the market.
The final data on business activity turned out to be better than preliminary estimates. Thus, the services PMI rose to 54.3 from 53.4, while the composite PMI advanced to 53.7 from 53.1. Analysts expected both indicators to stay unchanged. Yet, this reaction is hardly surprising as the market did not pay attention to the manufacturing PMI either.
Notably, the pound was declining in parallel with the European currency, which was falling much faster. It seems that the euro might have dragged the pound with it. If so, everything becomes more or less clear.
On Monday, Bundesbank Chief Joachim Nagel said the European Central Bank should be cautious when implementing monetary tightening. The rate hike would increase the borrowing costs for weaker EU nations and push them to bankruptcy.
His words generally come in line with what the ECB officials say. It is necessary to be very cautious when conducting monetary tightening. Otherwise, the economic situation may worsen instead of improve. This led to speculations that the regulator will raise the rate at a very slow pace which may not be enough to contain inflation. This could be the reason behind a sharp drop in the European currency.
The market has returned to the long-lasting trend of the US dollar strengthening. However, after such a spectacular rise, a correction is inevitable. The data on new jobs in the US may become such a catalyst for a correction. The indicator is expected to decrease to 11.3 million from 11.4 million, which indicates a deterioration in the labor market.
Yet, this data will be enough after such a strong movement yesterday to initiate a local rebound. Most likely, the final data on business activity will stay unnoticed.
Following the trajectory of the euro, GBP/USD tumbled by more than 200 pips and broke through the physiological level of 1.2000, thus extending the medium-term downtrend. The RSI on H4 has entered the oversold zone due to the excess of short positions and, as a result, the price pulled back. The RSI on D1 is moving in the lower area of the indicator near 30/50, which corresponds with the primary trend.
Get The News You Want
The moving averages of the Alligator Indicator on H4 and D1 are pointing down, generating a sell signal. On the daily chart, the US dollar is recovering by more than 82% compared to the uptrend in 2020–2021.
A local pullback towards the previously passed level could change the market balance, which may bring more short positions eventually. The next sell signal will appear after the price settles below 1.1900 on H4. This step will accelerate the descending cycle.
Comprehensive indicator analysis generates a buy signal in the short term due to a pullback. In the intraday and medium-term periods, indicators are signaling the downtrend.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.