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Pound to decline on poor manufacturing PMI data

The increasing possibility of a soft-Brexit, higher than expected third-quarter GDP growth of 0.5%, and m-o-m increase in the services PMI propelled the GBP/USD to a high of 1.2740 against the US dollar.

Ironically, the British Pound is the only currency, which gained against the Greenback in the past month. However, the recent economic data and geopolitical developments indicate that the GBP/USD has started losing momentum, and the trend is likely to continue in the days ahead.

The following paragraph outlines the reason for our bearish view on the asset pair.

The UK Office for National Statistics reported that the manufacturing output had fallen 0.9% m-o-m in October. It is the biggest fall reported since 2012. The temporary shutdown of the Buzzard oil field in the North Sea mainly contributed to the decline in the manufacturing output. It can be remembered that the output increased 0.6% m-o-m in September 2016. The analysts had expected the manufacturing output to rise by 0.2% in October. Total production, which includes mining and quarrying, decreased 1.3%, compared with September 2016.

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Andrzej Szczepaniak, the analyst at Barclays, anticipates the trend to continue in the first half of 2017 for two main reasons. Firstly, the inflationary pressure is at multi-year high. Secondly, the UK is expected to trigger Article 50 in the first half of 2017. The Brexit related negotiation strategy of the UK is not clear so far. Thus, firms would be very cautious and tighten their purse strings. This will keep the Pound volatile and weak.

In the case of the US, the ING analysts argue that if Trump implements his wish-list then the US Fed would be forced to increase the benchmark rate to as high as 2% within a short period of time. The loose fiscal and tight monetary policy would ensure that the US dollar remains stronger against its rivals. Thus, fundamentally, we forecast the GBP/USD pair to remain in a downtrend during the holiday period.

Technically, the GBP/USD pair faces resistance at 1.2630. The descending MACD indicator is on the verge of crossing into the bearish zone. Thus, a decline can be expected in the GBP/USD pair.

GBP/USD Pair: December 12th 2016

GBP/USD Pair: December 12th 2016

To capitalize on the probable decline, a short position can be opened in the currency pair near 1.2580 levels. A stop loss order can be placed above 1.2680 to limit losses. If the forecast turns out to be true, the profit can be booked at 1.2460.

A binary trader can bet on a low or below option to profit from the probable downfall of the GBP/USD pair. The investment should be made when the GBP/USD pair trades near 1.2580 levels. The trader should also choose a one week validity period for the contract.

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