US dollar Strengthens On Strong Non-farm, Wage Growth Data

US dollar Strengthens On Strong Non-farm, Wage Growth Data

Strategists at ING Group had forecast a rally in the Pound Sterling against the euro and dollar in the first half of 2018. The forecast was made on the observation that the UK prime minister Theresa May is not pursuing a complete break with the EU, as promised. However, economic data may act as a drag on the predicted rally. The US dollar, in the meanwhile, has started to strengthen after positive economic data posted last Friday. On the basis of details presented below, we expect the GBPUSD pair to decline from the current level of 1.4020.

According to a survey of the purchasing managers, the UK construction industry activity has come to a near halt in January. The IHS Markit construction PMI reading fell to 50.2, from 52.2 in the previous month. It is the fourth consecutive month of slowdown. Analysts had expected the level of activity in the construction sector to remain unchanged from last month. A reading below 50 indicates contraction, while a reading above 50 indicates expansion. While the poor construction sector data keeps the Pound weak, an upbeat job data strengthens the greenback.

On Thursday, the Institute of Supply Management reported a slight decline in the manufacturing PMI reading to 59.1 in January, from 59.7 in the earlier month. However, it was better than analysts expectation of 58.7. The latest figure is still above the average reading of 57.4 in 2017.

A day later, the US Bureau of Labor Statistics reported an increase in the non-farm payrolls by 200,000 in January, against analysts expectation of 181,000, and greater than the previous months employment change of 160,000. Furthermore, the unemployment rate stood unchanged at 4.1%, compared to last month, and in line with the estimates of economists. It is the lowest recorded unemployment rate in the past 17 years.

The near full employment situation in the US is now having a positive impact on the wage growth. The average hourly earnings increased 0.3% m-o-m in January, versus the median estimate of 0.2% by analysts. In December, the average hourly earnings increased by an upwardly revised 0.4%. On an annualized basis, the average hourly earnings grew 2.9% from a year earlier, compared with a 2.7% y-o-y growth in December. Analysts’ estimates had called for a 2.6% yearly growth in wages.

Following the strong manufacturing and non-farm employment data, the US dollar gained between 0.5% and 1% against its rivals. Strong economic data has also increased the prospects of four rate hikes in 2018. Therefore, fundamentals support a decline of the GBPUSD currency pair.

Technically, the GBPUSD pair is expected to face resistance at 1.4020. Both the main and signal lines of the MACD indicator are below the zero level. Therefore, a deeper decline can be expected in the GBPUSD pair.

GBPUSD - Technical Analysis - 6th February 2018

To trade the downtrend, we are planning to go short near 1.4020, with a stop loss order above 1.4140. We will book profit when the currency pair drops to a level of about 1.3850.

Additionally, we may also establish a binary option trade by placing a bet on a put option contract, which is valid until February 14. Before investing our surplus funds, we will make sure that the GBPUSD pair trades near 1.4020 in the currency market.

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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