[MARKET WATCH] Keeping a close eye on the GBP    

The upcoming week is another busy one for the financial markets. Not only do we have a variety of economic data released throughout the major economies, but we also await interest rate decisions from the Reserve Bank of Australia (RBA), Bank of England (BoE) and the European Central Bank (ECB).   

Myself, I will be keeping a very close eye on the UK’s economic releases this week. The GBP has been on quite a decline against the USD over the past few weeks, recording losses in thirteen out of the previous fourteen trading days and losing around 250 pips.

At first, it could be assumed that the profit taking in the GBPUSD was encouraged by a lower quantity of UK economic releases, alongside investors seeking the USD while geopolitical conflicts escalate elsewhere. However, downside moves in the GBPUSD gained speed on Friday, after the UK Manufacturing PMI decreased to its lowest level since July 2013. Impressive UK fundamental performances over the past 12 months have been the defining factor behind the GBP accelerating nearly 15% against the USD and encouraged increased speculation that the BoE will need to raise interest rates. The disappointing UK Manufacturing PMI opens up the suggestion whether there could be to the recent GBPUSD decline than possibly meets the eye.

In reference to upcoming UK economic releases, Markit Construction PMIs are announced on Monday, followed by Markit Services PMI on Tuesday and then Industrial/Manufacturing Production on Wednesday. Although all of these economic releases can be considered relatively high risk, it is important to keep an eye out for the Services PMI on Tuesday. The services sector is the United Kingdom’s main GDP component, reportedly employing around 80% of the UK labour force. A declining UK unemployment rate appears to be a critical factor behind when the BoE will raise interest rates, with Governor Carney hinting that an unemployment rate below 6% might influence the central bank’s decision.

“It is highly unlikely that the BoE will raise rates this coming Thursday and, unless a hawkish comment is released from the BoE following the event, buying pressure is not expected here. Beforehand, spectators will be closely watching the UK’s economic data. If there are any signs of the UK fundamentals slowing which could then further delay an interest rate hike, expect the GBPUSD’s recent downside movement to continue. Upcoming support on the Daily timeframe can be found at 1.6815, 1.6710 and 1.6730. If the GBP bulls do find a reason to rally back, resistance is located at 1.6891 and 1.6948. Similarly, signs of a decline in the GBP could present an ample opportunity for the EURGBP to recover some losses. Upcoming resistance is situated at 0.7978 and 0.8000.

The Aussie will also be suspect to volatility over the next week. Due to the Australian economy remaining under pressure to move away from reliance on mining exports and transition towards domestic consumption, the markets reacted negatively to the announcement that Australian Building Approvals contracted by a monthly 5% in June. The AUDUSD recovered some of those losses when Monday morning’s Retail Sales performed better than expected.

However, Tuesday morning’s RBA interest rate decision will pose an event risk. Although the Central Bank have indicated rates will be left unchanged for some time, the closing statement could create volatility. If the RBA continues with its recent position that the Australian dollar is overvalued, the Australian economy remains set to enter a period of weak growth or that investors continue to underestimate the risk of a significant drop in the AUD currency, the Aussie will be at risk. The week concludes with the latest Australian Employment Report on Thursday morning. If the RBA do attempt to inspire AUD weakness, AUDUSD support levels can be found at 0.9289 and 0.9205. Hypothetically, the possibility of the Australian dollar decreasing might encourage an opportunity for the AUDNZD to pullback. If this occurs, support is located at 1.0912 and 1.0874.

The press conference with Mario Draghi, following the ECB interest rate decision will always have the potential to create fireworks in the currency markets. The ECB President has made no hidden secret lately of his view that the EURUSD is overvalued (despite the EURUSD declining by nearly 500 pips over the past three months) and would prefer to see a lower valued EU currency. The ECB president was likely left bemused by investors purchasing the EURUSD after it was announced that the US unemployment rate increased from 6.1% to 6.2% in July.

Expect Draghi to be quizzed on his reaction to EU CPI unexpectedly slowing to its lowest level in five years in July, alongside signs of deflation already emerging in Spain. If Draghi hints that further ECB action is imminent, the EURUSD will likely encounter intense pressure.

*Ahmad is chief market analyst at FXTM.