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British Pound (GBP) 04/02: Pound Sterling Finds Support, UK Construction Sector PMI at Best Levels Since 2007

By Gary Howes
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    16:47: Tomorrow's trade dominated by Services PMI

    Markit Services PMI (Jan) is expected to read at 59.0, a touch higher than the previous month's 58.8.

    The precedent set by the two PMI readings thus far in February give us a rough guide as to how the British pound may react. A small miss or on-target outcome will likely see us revisiting this week's lows. A big miss will certainly see some fresh support levels broken. And a beat will probably encourage further consolidation.

    Unfortunately we are not hopeful of any major sterling gains anytime soon.

    16:42: Risks for sterling move to next week's Inflation Report

    Where are the next set of risks for sterling? Nick Bate at Bank of America Merrill Lynch says:

    "In the absence of any statement on Thursday accompanying the BoE policy decision, the risks for sterling will have shifted into next week's Inflation Report. While we are medium term GBP bulls, there are immediate near-term risks to the currency.

    "First, the recent deterioration in global risk appetite is bullish for EUR/GBP, given the UK's external funding requirements. Second, the risk exists of a lower inflation outlook in the Inflation Report, given the rise in sterling and UK yields alongside weaker commodity prices since November. Third, there is the potential for a change in language around forward guidance. The first two are currently the largest risks for sterling, in our view.

    "The other key factor for EUR/GBP is the inflation outlook in the Eurozone. While we do not expect the ECB to act this month, following the latest soft CPI report, the central bank is likely to remain concerned and project a dovish tone. In this context, EUR/GBP is likely to be relatively range-bound in the near term, before continuing its downward trend."

    16:12: Traders now questioning GBP/EUR rally

    "Most traders predict the pound will extend gains against the euro in 2014 given expectations UK economic growth will outpace that in the euro zone. But a flood of money from the developing world back into the euro's debt-laden periphery and safe haven bets like German bonds has given investors pause as to whether the euro's prospects are as bearish as all that." - Afex.

    15:25: Aus dollar to rally up to 6%

    A stark warning from Kathy Lien at BK Asset Management to those hoping for better rates on their Australian dollar purchases:

    "After selling off for the past 3 months with virtually no relief rallies, we believe that the Australian dollar has officially bottomed.

    "For the first time in 2 years, the Reserve Bank of Australia expressed comfort with the current level of interest rates AND their currency. By dropping their easing bias, the RBA set off a wave of short covering in the Australian dollar last night that we expect to continue in the weeks to come. In fact we are looking another 4% to 6% rally in the currency."

    If you agree with this viewpoint then we recommend you lock in your AUD purchases now.

    15:16: Clear Bullish Pin Candle in Sterling Dollar

    Matt Weller at GFT is bullish on sterling dollar, saying:

    "The GBP/USD ticked below the 1.6300 level in today’s Asian session before reversing back above that key level in early European trade. The pair put in a clear Bullish Pin Candle, or hammer formation, near the lows; this pattern shows a shift from selling to buying pressure and often marks a near-term bottom in a currency pair.

    "At this point, the pair could bounce back further (especially given the fundamental support from a strong Construction PMI report), with bulls initially targeting the Fibonacci retracements of the recent drop at 1.6342 (23.6%) and 1.6396 (38.2%)."

    13:00: Post-PMI boost fading

    The British pound is fading in early afternoon as markets shrug off today's strong Construction PMI outcome.

    12:22: GBP/USD must break 1.6350 ahead of further gains

    Boris Schlossberg on where the GBP/USD currently stands:

    "Cable also finally found some steady ground after several days of relentless selling. The UK PMI Construction report printed at 64.6 versus 61.6 - the highest reading since records began in 2008. Although Construction is the smallest sector to be measured by PMI reports it nevertheless confirms that UK economy continues to perform well and if tomorrow's PMI Services report which measures activity in the largest most important sector, beats the forecast, cable's rebound could extend significantly. For the time being the pair is capped at 1.6350 and needs to overcome that barrier in order to establish a more bullish bias."

    11:24: Support for GBP/USD proves true

    The pound dollar exchange rate has moved higher off support. Swissquote Research comment:

    "A support area implied by rising trendlines (around 1.6353 and 1.6320). Horizontal supports can be found at 1.6396 (20/01/2014 low) and 1.6305 (25/12/2013 low). Hourly resistances stand at 1.6485 (intraday high) and 1.6526 (29/01/2014 low).

    "In the longer term, the break of the major resistance area between 1.6381 (02/01/2013 high) and 1.6466 (10/12/2013 high) favours a bullish bias. However, given the overall overbought conditions, a break of the major resistance at 1.7043 (05/08/2009 high) is unlikely in the next weeks. A key support stands at 1.6305 (25/12/2013 low)."

    10:38: Construction in upward trend

    The British pound (GBP) has found support today from the realisation that the UK economy continues to recover at a decent pace.

    "The latest PMI reading is indicative of the construction sector growing at a quarterly rate of approximately 4%. The strong survey data therefore suggest that the surprise 0.3% fall in construction output indicated by official data in the fourth quarter merely represents a blip in an otherwise buoyant upward trend, with the data possibly having been affected by adverse weather." - Markit.

    09:58: Sterling's reaction to Construction PMI figures muted

    The strong result from the Construction sector has seen sterling stabilise more than anything. Indeed, this was the best reading seen since 2007. This reflects the relatively small role played by the sector in the UK economy. We would suggest the release of tomorrow's Services sector PMI will be more important.

    09:30: UK Construction PMI

    UK Construction PMI for January came in at 64.6 vs 61.5 expected, 62.1 previous. Sterling powers higher.

    09:16: Lloyds: These are good levels to buy GBP

    Lloyds Bank reckon the recent declines in sterling could be overdone:

    "Correlations show GBP/JPY along with USD/JPY to have been the most highly correlated cross with the S&P over the last month. There may also have been a single one off GBP negative flow.

    "However, the break of key support in GBP/USD at 1.6310 does open up the downside, with little obvious support now until the 1.6250 area. While there should be good resistance in EUR/GBP at 0.8330, there could be scope for a move to 0.8350. We still think these are good levels to buy GBP, with no significant negative news to justify current weakness, but for now the dominance of risk considerations suggests waiting for current negative momentum to fade."

    08:30: Pound sterling hammered in a 'stop-loss fest'

    Some good assessments concerning recent GBP weakness. Sean Lee at FXWW says a cascade of stop-loss selling - ie. the classic short squeeze - was responsible for the sharp moves:

    "GBP/JPY was the main mover yesterday driven by a carnage of trailing stops across the board; USD/JPY stops below 101.70 were indeed sizeable, Cable stops post-data were also significant and of course the cross then started falling like a stone once it cleared 167.50.

    "Be aware that there is solid technical support in GBP/JPY near 164.00 (38.2% retracement and 100-dma).

    "EUR/GBP joined in the stop-loss fest but still remains in a solid medium-term downtrend.

    "Cable support should be very firm at 1.6220 but a break below there will unleash more trailing stops."

    08:17: Pound / Aus dollar rate slumps

    Notable losses seen against the Australian dollar overnight as the Reserve Bank of Australia (RBA) tells markets it expects a 'period of stability' in interest rates, further confirmation the easing cycle is over.

    08:00: Can Construction PMI save the GBP rally?

    PMI Construction (Jan) is due today; we will need a good beat on the expected 61.5 being factored in by markets. I would imagine that expectations are pretty low after the Monday miss on the Manufacturing PMI and the subsequent fire-sale of sterling. Thus, any on-par result will likely be muted. No need imagining what will happen if there is another miss!

    Overnight thought: Before you write sterling off consider this …

    Yesterday's sterling sell-off appears to be more an expression of the need for a correction to the rally than a fundamental vote of no confidence.

    The UK Manufacturing PMI was the trigger, however, Alex Conroy offers this timely comment:

    "(The PMI) survey showed new orders were flooding in; this was welcome news for policy makers after mounting criticism on the recoveries reliance on consumer spending. Despite missing forecasts PMI is still running at one of the highest levels on record and signify a good start for the UK economy to the New Year."

    A rude start to the week for the British pound (GBP)

    The pound sterling (GBP) was send crashing lower over the course of Monday's session. But, there are suggestions that the sell-off was overdone:

    "GBP weakness yesterday looked overdone from a fundamental perspective, with the decline in the UK manufacturing PMI well short of the decline in the US index. GBP weakness was consequently better explained as a result of general weakness in risk appetite, with GBP/JPY and GBP/CHF bearing the brunt. Correlations show GBP/JPY along with USD/JPY to have been the most highly correlated cross with the S&P over the last month." - Lloyds Bank Research.