Lower-than-anticipated manufacturing and services PMI data reported early May weakened the Pound against the greenback. The downtrend was also aided by better-than-anticipated unemployment claims and a narrowed trade deficit in the US. However, we expect a reversal in the GBPUSD pair, which is trading at about 1.3310, due to the facts presented below.
According to the US Commerce Department, the orders for durable goods, which includes long-lasting manufactured goods, fell 1.7% m-o-m in April, compared with an increase of 2.7% in the earlier month. Analysts had expected the durable goods orders to decline by a maximum of 1.3%.
The University of Michigan consumer sentiment index declined to 98 in May, from 98.8 in the previous month. Economists had predicted no change.
In addition to the soft US economic data, the cancellation of the planned meeting between President Trump and North Korean leader Kim Jong-Un on June 12 has once again decreased the market’s risk appetite. All these factors are turning the US dollar weaker.
In the UK, the number of new mortgages approved for home purchases by High Street banks during April increased to 38,000, from 37,600 in the earlier month. Analysts had expected the number of new mortgage approvals to be 37,500.
Furthermore, analysts at GlobalFX Capital Pty Ltd believe that markets have given too much importance to the news of a possible collapse of Theresa May’s government. The pessimism has driven the Pound much below its fair value. Analysts also expect the inflation, which has slowed unexpectedly to 2.4% in April, to encourage the Bank of England to deliver another interest rate hike, leading to the strengthening of the Pound.
Hann-Ju Ho, Senior Economist with Lloyds Bank, expects the Bank of England to raise interest rates to 0.75% in August. The financial markets are giving a 50% chance of a rate hike in August and a 90% chance of a rate hike in November. Credit Suisse has also stated that they believe the Pound is a “buy on dips”. Therefore, economic data and fundamentals favor a reversal in the GBPUSD pair.
The historical price chart indicates that the GBPUSD pair is trading near its major support at 1.3310. Furthermore, the CCI indicator has started rising after declining below the reading of -200. So, we expect a bounce back to happen soon.
In the Forex market, we are planning to open a long position at or about 1.3310 in the GBPUSD pair. To limit risk, we would place a stop-loss order below 1.3210. If the currency pair reverses as expected, then the long position will be diluted near 1.3510.
Additionally, we may also pick up a call option contract from a binary broker to gain from the GBPUSD uptrend. An investment may be made by us, provided the GBPUSD pair trades near 1.3310 and the option contract remains active for a period of one week.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
