GBP/USD Forecast May 18-22 – Decline in GDP Sends Pound Reeling

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GBP/USD had a miserable week, falling 2.4 percent. This week features six events, including employment, inflation and retail salesHere is an outlook for the highlights and an updated technical analysis for GBP/USD.

In the U.K, first-quarter GDP declined by 2.0%, the first decline in three quarters. Analysts had expected a sharper decline of 2.6 percent. Monthly GDP plunged by 5.8% in February, but this beat the forecast of -7.9 percent. On the manufacturing sector, manufacturing production fell by 4.6%, the first decline since November. This figure beat the estimate of -6.0 percent.

In the U.S., inflation contracted in April, as the economy continues to buckle under the weight of the Corvid-19 pandemic. CPI declined by 0.8%, down from -0.4% a month earlier. The core read fell by 0.4%, down from -0.1% in the previous release. Both figures missed their estimates. Unemployment claims continue to fall and dropped below 3 million last week, with a release of 2.98 million. Still, this missed the estimate of 2.5 million. Retail sales were awful in April – the headline figure fell by 16.4%, while the core read declined by 17.2 percent. Analysts had projected declines of -12.0% for the headline and 16.4 for the core releases.

GBP/USD daily graph with resistance and support lines on it. Click to enlarge:

  1. UK Employment Report: Tuesday, 6:00. Despite the mass lockdown due to Corvid-19, the British labor market remains relatively unscathed. Wage growth dipped to 2.8% in February, down from 3.1% in the previous release. This marked the lowest gain since August 2018. The downturn is expected to continue in March, with a forecast of 2.7 percent.  Unemployment claims actually fell in March, from 17.3 thousand to 12.1 thousand. Analysts had projected a huge decline of 170 thousand. We will now receive the April data.  The unemployment rate is expected to jump to 4.4%, up from 4.0 percent.
  2. UK Inflation Report: Wednesday, 6:00. Consumer inflation continues to fade, falling to 1.5% in March. This was down from 1.5% and was the weakest reading in four months. The core figure dropped from 1.7% to 1.6%. In April, the projection is 0.9% for the headline reading and 1.4% for core CPI.
  3. Manufacturing PMI: Thursday, 8:30. The final reading for April came in at 32.6, shy of the estimate of 42.0. The initial read for May is projected to slip to 35.1 points. The 50-level separates contraction from expansion.
  4. Services PMI: Thursday, 8:30. Markit’s forward-looking indices for the UK economy culminate in the publication for the services sector. The country’s largest sector has been in free-fall, as it declined to 13.4 points in April. The initial reading for May stands at 20.0 points.
  5. CBI Industrial Order Expectations: Thursday, 10:00. UK manufacturers continue to report sharp falls in output volumes and total new orders. The indicator plunged to -56 in April and May is also expected to be awful, with an estimate of -50 points.
  6. Retail Sales: Friday, 8:30. Retail sales crashed in March, with a dismal read of 5.1 percent, as worried consumers are cutting sharply on spending. Analysts are bracing for a sharp plunge in April, with an estimate of -16.0 percent.

Technical lines from top to bottom:

With GBP/USD recording sharp losses last week, we start at lower levels:

1.2420 (mentioned last week) has some breathing room in resistance following sharp losses by GBP/USD.

1.2330 is next.

The round number of 1.22 has switched to a resistance role. It had provided support since mid-April.

1.2080 is a weak support level. It is protecting the symbolic 1.20 level.

1.1944 has held in support since mid-March.

The round number of 1.18 is the final support level for now.

I remain bearish on GBP/USD

The British economy contracted in Q1 and the manufacturing and services sectors are struggling. Given these poor economic conditions, the bias towards the British pound remains negative.

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About Author

Kenny Fisher - Senior Writer A native of Toronto, Canada, Kenneth worked for seven years in the marketing and trading departments at Bendix, a foreign exchange company in Toronto. Kenneth is also a lawyer, and has extensive experience as an editor and writer.

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