Bearing in mind one of the major drivers behind the recent GBPUSD rally was USD weakness, it was only natural that the pair would be vulnerable to downside pressures as the USD began to strengthen. The pair has now pulled back by 200 pips since the beginning of the week and to be honest, there is still potential for the GBPUSD to continue slipping lower.
There is very little economic data scheduled to come out on the UK economy for the remainder of the week, while the data outflow from the United States is far heavier and this means that the Dollar will continue providing direction for the Pound.
When the USD sentiment is weak this is generally positive for the GBPUSD bulls, but with the major currency currently enjoying at least a revival against other trading partners, the outlook for the GBPUSD is bearish. It is also worth noting that UK Prime Minister David Cameron’s upcoming discussions in Brussels over reforms before a possible future EU referendum could further weigh on investor sentiment towards the Pound.
Some might say that it is still a bit premature to suggest that USD appetite is fully returning among traders, but the major currency is at least enjoying a revival on the currency markets. Why might that be? Well, I think there is a valid argument to suggest that the Dollar had become oversold, with this being even more the case when you consider that most expect the Federal Reserve to begin raising interest rates in September. I basically think that there is no reason for the central bank to hold back any longer from rate rises and after two further global economic downgrades in recent weeks, the Federal Reserve finally pulling the trigger on rate rises would provide the global economy with a huge vote in confidence.
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Outside of the continual US interest rate talk, it is also possible that the USD is strengthening after the latest GDP report showed that the US economy contracted slightly less than expected in the first quarter of the year. Recent US economic data is also consistently validating the Federal Reserve’s previous statements that any reduced domestic momentum would be temporary, and confidence is continuing to grow that the US economy is rebounding strongly as the year progresses. Traders will be looking for further evidence of improved economic momentum when the US Personal Spending figures are released on Thursday afternoon, and we are likely to encounter a USD rally if this report beats expectations.
While there is no doubt that the star performer for the US economy is job creation, there are still concerns that consumers are nowhere near spending enough for the amount of jobs that have been created in the United States over the previous 18 months. This is even more the case when you consider that consumer spending represents such a huge amount of the US economy, and I do think investors will be closely monitoring the Personal Spending figures. What happens if the Personal Spending figures remain weak? I wouldn’t expect the Dollar to be under too much pressure unless there is a huge miss in the data. At the end of the day, a continuation of flat consumer spending data is not going to prevent the first US interest rate rise, although it will provide a reason for future interest rate rises to be expected at a slow pace.
Follow Jameel on Twitter @Jameel_FXTM
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