The British pound (GBP) extended its downward trend, hitting a seven-month low against the US dollar (USD) around 1.3000, but GBP/USD buyers quickly jumped in and regained some ground afterwards.
The British pound rebounded. not out of the woods yet
A sudden return to safe-haven flows has created a strong headwind for the risk-sensitive pound sterling, pushing the dollar to a five-month high against its six major currency rivals.
The theme of “selling everything” has gripped the market as traders witness a wave of exhaustion following a record rally in global stocks driven by artificial intelligence (AI). U.S. tech stocks fell, with major indexes sinking as investors sold gold to cover stock market losses.
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Investors became increasingly concerned about the soaring valuations of technology stocks, particularly in the artificial intelligence (AI) sector, spurring a long-awaited correction in global indexes.
That said, waning expectations that the US Federal Reserve will cut interest rates further in December also provided new support for the US dollar. Bets on a Fed rate cut in December diminished after strong U.S. private sector employment and services activity data.
Data released by ADP showed U.S. private payrolls rose by 42,000 jobs in October, beating expectations for a 25,000-job gain, while last month’s ISM services PMI rose to 52.4, higher than expected due to strong growth in new orders.
This broad-based USD strength led to the GBP/USD pair challenging the psychological level at 1.3000 before making a decent rebound later in the week.
Cable’s turnaround was largely due to a sharp decline in the overall U.S. dollar and U.S. Treasury yields after Thursday’s civilian labor data, which resurfaced concerns about a prolonged government shutdown.
Executive outplacement firm Challenger, Gray & Christmas said Thursday that companies reported a 183.1% increase in monthly layoffs, the worst October figure in more than 20 years, according to Reuters.
Concerns about weakening US labor market conditions have increased following the latest employment data, with the probability that the Fed will cut interest rates next month now at 69%, slightly increasing the chance of a decline to 62% seen after the release of the US ADP employment change data.
GBP/USD’s recovery was unfazed by the Bank of England’s (BoE) dovish hold decision. Members of the BoE’s Monetary Policy Committee (MPC) voted 5-4 to keep the key bank interest rate at 4%, a narrower-than-expected vote.
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The BOE stressed that future rate cuts will depend on developments in the inflation outlook. “If progress in eliminating inflation continues, bank interest rates are likely to continue on a moderate downward trajectory,” the Monetary Policy Statement (MPS) said.
Heading into the weekend, the US dollar was again under selling pressure, helping GBP/USD rise. According to the monthly report published by the University of Michigan (UoM), the consumer confidence index fell to 50.3 in November from 53.6 in October.
1 week ago: High-impact UK data in the spotlight
Amid a holiday-shortened week and with no end in sight to the government shutdown, the lack of data from the U.S. is likely to continue.
The longest shutdown in U.S. history will bring renewed attention to some private sector statistics and speeches from Fed officials. If government funding is restored, it will provide much-awaited data on lagging U.S. nonfarm payrolls and unemployment claims.
The US Consumer Price Index (CPI), Producer Price Index (PPI), and retail sales report for October will also receive attention.
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Looking at the United Kingdom’s (UK) economic calendar, Tuesday’s jobs report will provide some stimulus to sterling traders.
On Wednesday, BoE chief economist Hugh Pill will speak on a panel entitled “Assessing the BoE’s response to the coronavirus” at the International Monetary Institute conference hosted by the University of Buckingham.
On Thursday, preliminary monthly and preliminary figures for the UK’s third quarter gross domestic product (GDP) data will be featured, along with industrial statistics.
GBP/USD: Technical outlook
As observed on the daily chart, GBP/USD is on the road to recovery, struggling at 1.3142, where the previous strong support turned into resistance.
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The 14-day Relative Strength Index (RSI) has started to decline, staying below the midline and currently sitting at around 36, suggesting further downside room remains.
To add credence to the bearish possibility, the 21-day simple moving average (SMA) is aiming to end the week below the 200-day SMA, which would confirm a bear cross.
These technical indicators point to more pain for the GBP/USD pair heading into the new week.
If the above-mentioned resistance expands decisively, strong resistance will be located near the 1.3265 area, approaching the August 4th low, 21-day and 200-day SMA.
A sustained rise above this zone will result in a further recovery towards the 50-day SMA barrier at 1.3393.
Conversely, if the downside regains momentum, a test of the multi-month low at 1.3010 will be inevitable.
A break below the latter would increase selling pressure and open the door for the April 11 low of 1.2967.
The last line of defense for GBP buyers appears to be at the psychological level of 1.2850.
