British Pound Could Break 1.96 on Weak Trade Balance
The UK trade balance is due for release tomorrow and weak numbers could drive the British pound below 1.96 against the US dollar. The price action in the stock, bond and currency markets suggest that traders do not expect good news.
What Are The Markets Facing?
The UK trade balance is due for release tomorrow and weak numbers could drive the British pound below 1.96 against the US dollar. The price action in the stock, bond and currency markets suggest that traders do not expect good news. Last month, manufacturing PMI fell to the lowest level since 2001. The export orders component of the report also deteriorated, which is why we believe that the UK trade deficit will continue to grow. As the Bank of England’s monetary policy meeting approaches, more people are talking about the possibility of a rate cut this year. Recent data indicates that the UK economy is in serious trouble and a recession could be right around the corner.
Bonds - 10-Year UK Gilt Futures
Repeated disappointments in economic data have driven UK bond prices higher. The market has gone from pricing in a rate hike by the Bank of England sometime this year too the minor possibility of a rate cut. If the trade balance misses, bond prices could head towards resistance at 107. If it surprises to the upside, we could see a move back to support at 105.29 but that is still unlikely because even if the trade numbers are good, they will not be enough to convince the Bank of England to raise interest rates.
FX – GBP/USD
Traders continue to push the British pound lower against the US dollar. Since last Wednesday, the currency pair has fallen close to 300 pips. It has now broken below the 100-day SMA, leaving the door open for a move down to support at 1.96. This level is the 23.6 percent fibo retracement of the 2.039 to 1.936 sell-off. The 100-day SMA at 1.98 is resistance. Judging from the price action of UK gilts, bond traders are leaning towards weaker numbers. This coincides with the FX market’s outlook for the GBP/USD, which is in favor of further losses.
Equities – FTSE Index
The lack of recovery in the financial sector paired with fading growth prospects spurred bearish sentiment for the FTSE100. As growth concerns continue to press on investors, an improvement in the trade deficit could lift the index to test for resistance at 5,595 and then 5,700. However, if the trade conditions deteriorate, the index may fall below the near-term support at 5,354. Looking ahead, market participants should expect increased volatility on Thursday as the Bank of England meets to set the benchmark interest rate once again, which may give some insight to where the index may be heading.
Written by Kathy Lien, Chief Strategist and David Song
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