A Difficult Week Ahead for Pound Sterling, Sell GBP/USD say ING
"While GBP/USD brushed off a sequence of hefty negative UK data surprises back in April, we do not suspect that lightning will strike twice" - Viraj Patel @ ING.
Strategists at ING believe the pound is likely to fall against the US dollar over the course of the next five days. Here’s why.
Analysts at ING have suggested to clients they sell sterling using dollars at the head of what promises to be a soft week for the UK currency.
The sell call on GBP/USD comes after the latest data on foreign exchange market positioning shows the market is no longer heavily biased against the UK currency, as was the case through the course of the first four months of 2016.
This is a significant observation as it suggests the market once again has the capacity to do some serious damage to the pound with a huge portion of the market once again available to sell the pound.
Justifications for the Sell Recommendation
Eyeing out a “difficult week ahead,” ING’s Viraj Patel says this weeks three big economic data releases are expected to accelerate concerns over a slowdown in the domestic economy.
Furthermore, a resurgent USD, coupled with waning support from the global risk environment and the renewal of Brexit risks, means that a sharp fall in GBP/USD may be on the cards.
The call from ING comes a week after we reported a similar call issued by Westpac who cited three fundamental reasons to press the sell button.
From a technical perspective, Patel reckons those watching the market should anticipate the for the 50/100-dma support to give way, with scope for a move to 1.4100/50 where they calculate short-term fair value resides.
GBP/USD broke above the 100 day moving average in mid-April and at the time we forecast the pair would head notably higher as a barrage of sell orders were cleaned out of the market. The call was accurate as the pair rose right through to the end of the month.
We would now expect the 100 day MA to provide support, but beware, once the level gives way expect a quick and potentially sustained drop.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3372▼ -0.11%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2917 - 1.2971 |
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* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Data Points to Trigger the Move Lower
Watch out for the triple threat from UK data this week.
ING are expecting a poor showing from the three big data releases due out this week: inflation on Tuesday, wages on Wednesday and retail sales on Thursday.
The loss of economic momentum in the UK has been notable over the past two months:
ING’s Senior Economist James Knightley notes the following on each of the big three data points due for release:
· Inflation: Both headline and core inflation have been moving higher (albeit from very low levels), thanks to GBP weakness and recovering oil prices. A tight labour market might also be having an influence, while the timing of Easter provided a boost to the Mar readings. Yet, we look for inflationary pressures to stabilise in the Apr report partly due to a big downward swing in airfares (headline CPI to come in at 0.5% YoY).
· Labour market report: A strong economy in recent years has led to a rapid tightening in the UK jobs market. In fact, there are more job vacancies right now than there are people claiming unemployment benefits; this should eventually lead to rising wage pressures. However, Brexit-related worries ahead of the June referendum have led to a dramatic change in hiring patterns; businesses are increasingly taking a “wait-and-see” stance to expansion plans. We may see unemployment rise, employment fall and a slowdown in wage growth in this week’s report.
(BMO Capital’s Stephen Gallo reckons this will be the more important event for sterling this week).
· Retail sales: Retail sales fell sharply in March despite the timing of Easter, but we have to recognise that the series has been very volatile of late. Brexit uncertainties may be influencing spending to some degree, though the positive fundamentals of rising real incomes and jobs growth means that we look for a moderate rebound.
"While GBP/USD brushed off a sequence of hefty negative UK data surprises back in April, we do not suspect that lightning will strike twice," says Patel.
Several recent developments suggest that GBP could succumb to this week’s data pressures:
GBP support from the positive risk environment is seen fading; last week we reported that the same team of analysts at ING saw risk as providing a positive environment within which GBP has been allowed to appreciate.
It was argued that the shift in global risk sentiment (from bearish to tentatively neutral) had been a positive driver for GBP, accounting for approximately half of the recovery since March.
“Yet, signs of a stabilisation in risk sentiment (as opposed to new found optimism) have seen this positive impulse fade,” says Patel.
Referendum Risks Seen Resurfacing
On the topic of the EU referendum, Patel & Co. say Brexit risks could start resurfacing after a period of exhaustion.
Brexit-related headlines rose notably last week and we expect the narrower focus on the EU referendum to add another leg of downside to GBP (via the risk premium channel),” says Patel.
With the pre-vote purdah starting on 27 May, Treasury officials will be releasing their analysis on the short-term implications of a Brexit soon (keeping the spotlight firmly on the topic).
