Pound Turns Weak on Decline in Consumer Spending

Pound Turns Weak on Decline in Consumer Spending

In our July 26 report, we had forecast a rally in the GBPUSD pair and informed our intention to go long near 1.3010 in the OTC market. We had also revealed our interest in purchasing a call option offered by a binary broker. A week later, the pair hit a high of 1.3265 and that resulted in a profit in both the trades. Now, the GBPUSD pair has lost most of its gains and is currently trading at 1.3050 levels. We anticipate the currency pair to decline due to arguments presented below.

Last Thursday, the Bank of England decided to leave the interest rates unchanged at 0.25%. While there was no surprise factor in the decision, the statement that accompanied the announcement turned the market’s mood to bearish towards the Pound. The Bank of England opined that there might not be any rate hike in the months ahead due to weakness in economic activity. The BoE also slashed the UK growth forecast to 1.7%, from 1.9% issued earlier.

The recent consumer spending data released by Visa seemed to reflect the opinion of the BoE. The Visa data indicate that the consumer spending had declined 0.8% (annualised) in July. It is the third consecutive month of fall in consumer spending. Visa’s consumer spending data is not relevant only to the Pound. However, economists closely monitor the data to understand the negative impact of rising inflationary pressure that outstrips wage rise in the UK. The data would certainly justify the BoE’s decision to avoid a rate hike in the near future.

According to Annabel Fiddes, Principal Economist at IHS Markit, uncertainties over the outcome of Brexit negotiation and its impact on the economy is weighing down consumer confidence. Thus, chances of a recovery in consumer spending are quite low as of now, and this would keep the Pound bearish.

The recent employment data from the US has once again ignited speculation of another Fed rate hike. On Friday, the Department of Labor stated that the economy added 209,000 non-farm jobs in July, versus analysts’ expectations of an addition of 222,000 jobs. Notably, last month, non-farm payrolls increased by 231,000. The unemployment rate declined to 4.3% in July, compared with 4.4% in June, and in line with market’s estimates. The robust job data would increase optimism among policy makers that the inflation will gradually rise and reach the 2% target level. Thus, a decline in consumer spending is expected to keep the Pound weak, while the Greenback is forecast to turn bullish on strong job data.

Technically, the GBPUSD pair has broken the support at 1.3050. The MACD indicator is making new lows below the zero line. That indicates a weakness in the currency pair. The bearish scenario is also confirmed by the sub 100 readings of the momentum indicator.

GBPUSD - Technical Analysis - 9th August 2017

We wish to trade the GBPUSD pair by taking a short position near 1.3020, with a stop loss order above 1.3140. The position will be covered when the pair declines to 1.2830 levels.

Alternatively, we are also looking at the possibility of purchasing a below or low option from a suitable broker. An option expiration date around August 17th and a strike price of about 1.3020 is what we look for to enter the trade.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

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