The pound moving sideways ahead of GDP release

Hi Everyone,

Bank of England Meeting Offered Little Surprises

The Bank of England confirmed their dovish stance during their last week’s meeting by leaving interest rates and level of asset purchases unchanged. BoE officials and Governor Bailey voted unanimously to keep interest rates at an ultra-low level of 0.1% and maintain bond purchases at a cumulative GBP 895 billion (U$ 1.2 trillion) by the year end. This decision comes on the back of Prime Minister Johnson announcing a one-month extension of the UK’s country-wide lockdown. The country, once praised for their successful vaccine rollout, is now struggling with the rapidly spreading delta variant among the young and unvaccinated.

The BoE’s dovish comments mark a clear divergence in central bank policy stance. While no firm policy change has been introduced on either side of the Atlantic,the Federal Reserve Bank of the US has started discussing the tapering of asset purchases and brought the date of a potential rate hike forward by a year. This contrasts with comments from the ECB and BoE; both Lagarde and Bailey are worried about economic uncertainty and the risk of a policy mistake as the economic data has been volatile. Noise in the short-term data, especially around inflation and unemployment, have left central bankers with little choice but to wait.

Measured against the USD, the pound shed 33 basis points on the day of the announcement but closed the week up half a percentage point near 1.3870. The pound has been trending lower on the daily chart with momentum indicators signaling a further move lower. Key long-term support has formed near 1.3800 while 1.3900 is likely to offer a strong resistance. The weekly chart of GBPUSD is still looking bullish, but the momentum is clearly weakening.First quarter GDP data for the UK is published this week and the consensus expects a contraction of -1.5% on a quarter-on-quarter basis. This means the United Kingdom is in a technical recession with the economy contracting for two consecutive quarters. The pound is likely to be forced to retreat lower with limited positive catalysts on the horizon to support the economy and the currency.

Upcoming OPEC Meeting Might Push Oil Higher

OPEC and its allies are gathering for their monthly meeting this Thursday. With oil futures currently near $74 bpd levels, there is plenty to be optimistic about. Data from the US is showing that the country has mostly re-opened with California and New York lifting most COVID-19 related restrictions. TSA data shows there were roughly around 2 million American travelers per day passing checkpoints in June 2021, still short of the 2019 numbers of 2.4 million. However, these numbers have recovered strongly when looking at the 0.5 million travelers per day seen in 2020. The European Union, which is still around two months behind in terms of vaccination and economic recovery, has implemented a union-wide digital vaccination passport, which allows fully vaccinated residents to travel quarantine-free.

On the flipside, stubbornly high infection rates in Brazil and India, as well as the rapidly spreading delta variant, might force the cartel to be cautious. After the historic event in 2020 when oil futures dipped below zero, OPEC+ is likely to take measured steps before increasing production from current levels. Around 40% of the production cuts introduced in 2020 have been restored, and the cartel is under pressure from countries such as India to increase supply even more as the global economy is thirsty for oil.

US equity markets were red hot last week withS&P 500 index gaining 2.74% and hitting an all-time high of 2,480.69. Technology-heavyNasdaq-100 was up 2.1% , also closing at a record high of 14,345.18. Value and small-cap focused Russell 2000 jumped the most among major indices , rising 4.32%. The USD, measured as DXY, shed 51 basis points to $91.8. A weaker dollar lifted gold by a percentage point to 1,781.65. Oil jumped 3.6% ahead of the OPEC meeting.

Have a great trading week ahead!

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In The Spotlight

DayInstrumentEventPrevious Consensus 
TuesdayEURPreliminary Germany CPI (YoY)-June2.4%2.1%
WednesdayCNYNBS Manufacturing PMI -June51.050.7
WednesdayCNYNON-Manufacturing PMI -June55.252.7
WednesdayGBPGDP(QoQ)- Q1-1.5%-1.5%
WednesdayEURPreliminary Euro Area Core CPI (YoY)- June1.0%0.9%
WednesdayJPYTankan Large Manufacturing Index -Q25.015.0
ThursdayUSOILOPEC+ Meeting
ThursdayUSDISM Manufacturing PMI -June61.261.5
FridayUSDNon Farm Payrolls -June559*675*

*In USD thousands

• German Consumer Price Index
CPI, or inflation, measures the rise in consumer prices in an economy over a certain period of time. Higher inflation means that consumer prices have grown compared to the previous period. A higher than expected rate may be both positive or negative for the currency as the market does not like inflation expectations too far off from consensus. Generally, both high and negative inflation are bearish for currency, while positive and low inflation, in line with the consensus, is bullish.

• United Kingdom Gross Domestic Product
GDP data shows the monetary value of all the goods and services produced in any economy. A negative number indicates a contraction of economic activity while a positive number shows an expansion. A better than expected GDP growth is generally positive for a currency, whilst a print below expectations tends to be negative.

Market Sentiment

EURUSD has turned bearish and is in sell mode. Momentum indicators are above the price with the 8-day exponential moving average offering resistance near 1.19530. There is moderate energy in the bearish momentum, while price is near oversold levels. The weekly chart signals a weakening of momentum as well, as the short-term moving averages are crossing below the medium-term moving averages. It seems likely that EURUSD could move lower from here. Resistance levels have formed near 1.19530 and 1.19930, while support is near 1.19170 and 1.18540.

Resistance: 1.19530
Support: 1.19170

GBPUSD is in short-term sell mode with the price currently testing the 8-day exponential moving average resistance level. Momentum indicators signal a bearish trend with moderate energy. With the oscillators showing that the price is currently in neutral territory, a downward move from here seems likely. The weekly chart still looks bullish, but the momentum is receding. Resistance levels are near 1.39325 and 1.39700, while support levels sit at 1.38680 and 1.37980.

Resistance: 1.39325
Support: 1.38680

NZDUSD is attempting to recoup losses with its price currently climbing above the 8-day exponential moving average. Short-term momentum is bearish, while the pair still looks bullish when considering a longer timeframe. There is moderate energy in the momentum with ADX currently near 30. Resistance levels are near 0.71010 and 0.71200, and support is near 0.70450 and 0.70185.

Resistance: 0.71010
Support: 0.70450

XAUUSD has been moving sideways after slumping in mid-June. Its price is near the 8-day and 100-day moving average resistance levels. Momentum indicators signal a strong bearish trend but the price is flirting with oversold levels and likely to move lower or sideways from here based on technical indicators. Resistance levels are near 1,790.08 and 1,798.07. Support levels have formed near 1,771.82 and 1,760.97.

Resistance: 1,790.08
Support: 1,771.82

Kaia Parv, CFA, is an experienced Portfolio and Investment Manager with exposure to both public and private markets. Before joining FXPRIMUS, Kaia was a Senior Investment Associate at EFA Group and a Vice President in Bank of America Merrill Lynch.

Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.

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