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Pound weakens on indications of UK economic slowdown

The Pound had a stupendous rally against the Greenback during the past two months. Good economic data coupled with announcement of early election in the UK supported the Pound’s uptrend against the US dollar.

In the past one month, the GBP/USD pair had galloped about 500 pips to reach a high of 1.3047. However, the pair is exhibiting signs of a bearish reversal in the past few trading sessions due to reasons discussed below.

The second GDP estimate reported by the Office for National Statistics confirmed fears of economic slowdown in the UK.

A decline in the household spending and retail sales had resulted in a lower than anticipated GDP growth of 0.2% q-o-q in the March quarter, compared to 0.3% in the previous quarter. Analysts had expected the GDP growth to remain flat at 0.3%, compared to the last quarter.

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Contrary to assumption, the recent survey of the UK snap election showed that the lead between the Conservatives and Labour party has narrowed considerably. In fact, a survey by YouGov indicates that the Conservatives lead the Labour party by 43% to 34%. Earlier in April, the market gave a big thumps up to the surprise election announcement on the assumption that the Conservatives would make huge gains thereby giving a practically free hand to May in Brexit negotiations. However, that argument no longer seems to have credibility. Thus, sentiment towards the Pound has turned bearish.

The Pound is also under pressure due to an increasing confidence of the investors on the Euro zone. The political uncertainty has almost disappeared, following the victory of Emmanuel Macron in the French election. The economy is also showing signs of inflationary pressure. As the Euro gets more attractive, the Pound is losing its sheen.

In the US, the minutes of the FOMC meeting showed that the majority members of the rate setting committee are in favor of a rate hike in June. This has expelled fears of a postponement of a rate hike. Following the report, the odds of rate hike have again increased to about 78%. As we go forward, the US dollar is expected to gain strengthen when the market starts pricing in the rate hike. Thus, fundamentals favor a decline of the GBP/USD pair at this point in time.

The price chart clearly reveals that the GBP/USD pair had broken the ascending channel. The stochastic oscillator is out of the bullish zone and is descending. The momentum indicator has fallen sharply to a few notches above the 100 level. Thus, it is evident that the pair sees an increase in the selling pressure.

GBP/USD Pair: May 29th 2017

GBP/USD Pair: May 29th 2017

By going short in the GBP/USD pair, the downtrend can be used to generate profits. So, we plan to open the short trade near 1.2840, with a stop loss order above 1.2960. We have set our sights on 1.2600 for booking profits.

We may also consider establishing a similar trade in the binary market by investing in a low or below contract. At the time of investing, we would choose a day around June 7th as the option expiration date. Finally, we would only enter when the pair trades near 1.2840 in the OTC market.

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