GBP/USD Outlook May 5-9

GBP/USD  broke above the 1.69 line last week, but settled for modest gains and closed at 1.6869. This week’s highlights are  Services PMI  and Manufacturing Production.  Here is an outlook for the main events moving the pound, and an updated technical analysis for GBP/USD.

In the UK, GDP and Manufacturing PMI were solid.  The news was also positive out of the US, as the  week ended with an excellent US Nonfarm Payrolls  release.  As well, manufacturing and consumer confidence indicators were strong. At the same time, Federal Reserve chair Janet Yellen remains cautious about the US economy.

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

1. Halifax HPI:  Tuesday, 6th-8th. This house inflation index provides a look at the  extent of activity in the housing sector. The March release was one to forget, as the index came in at -1.1%, well below the estimate of 0.7%. The markets are expecting a strong turnaround, with a forecast of 0.8%.
2. Services PMI:  Tuesday, 8:30. This is the first major event of the week. The index continues to post figures in the high-50 range, pointing to continuing expansion in the services sector. The March reading came in at 57.6 points, falling short of the estimate of 58.2 points. Little change is expected in the upcoming release.
3. BRC Shop Price Index: Tuesday, 23:01.  This index measures the change in inflation in the BRC chain, giving analysts  additional data about the level of consumer inflation in the UK. The indicator continues to record declines, with the March release coming in at -1.7%.
4. RICS House Price Index: Wednesday, 23:01. This minor event measures the percentage of surveyors reporting an increase in house prices, providing data about activity in the housing sector. The indicator jumped to 57% last month, well above the estimate of 45%. Little change is expected in the upcoming release.
5. Asset Purchase Facility: Thursday, 11:00. The BOE has maintained its QE level at 375 billion for almost two years. The markets are not expecting any change in May.
6. Official Bank Rate: Thursday, 11:00.  With the UK’s economic recovery well under way, there is increased speculation about a rate hike, although none is expected before 2015. So the BOE is expected to keep rates at the current level of 0.50%. The MPC will release a Rate Statement announcing the May rate.
7. Manufacturing Production: Friday, 8:30. This is a key event which can impact on the movement of GDP/USD. The indicator surprised the markets with a 1.0% increase last month, crushing the estimate of 0.3%. The estimate remains at 0.3% for the May release.
8. Trade Balance: Friday, 8:30. This is one of the most important indicators and should be treated as a market-mover. It is closely linked to currency demand, as foreigners must purchase  British pounds  in order to buy  British goods and services. In March, the deficit narrowed to GBP -9.1 billion, slightly better than the estimate of GBP -9.3 billion. The estimate for the upcoming release stands at GBP -9.0 billion.
9. NIESR GDP Estimate: Friday, 14:00. This indicator is published monthly, assisting analysts to track GDP, which is released every quarter. Like GDP, the GDP estimate continues to post strong gains, and came in at 0.9% in March. The markets are looking for another strong reading for the April reading.

* All times are GMT

GBP/USD Technical Analysis

GBP/USD opened the week at 1.6805.  The pair dropped to a low of 1.6777,  breaking below support at 1.6823 (discussed last week). The pair then reversed directions and broke above  the  1.69 line, touching a high of 1.6919.  GBP/USD  closed the week at 1.6869.

Live chart of GBP/USD:

[do action=”tradingviews” pair=”GBPUSD” interval=”60″/]

Technical lines from top to bottom

We  start with resistance at 1.7375. This line marked the start of a sharp pound rally in March 2006, which saw the GBP/USD push above 2.11.

Next is 1.7180, which  has served in a resistance since October 2008. This is followed by 1.6990, which  is protecting the  key  psychological  level of 1.70.

1.6823 had a busy April, and was breached yet again  last week. This line has switched to a support role as we start off the week.

1.6705 is the next support level. It has  strengthened as the pair trades close to the 1.69 level.

The round number of 1.6600  follows. It has remained intact since early April, when the pound started its current rally. 1.6475  is the next support level.

1.6343 saw some activity in early February but has provided strong support since that time.

The  final  support line for now is 1.6247.

I remain  neutral on GBP/USD.

Fundamental releases out of both the US and UK were solid last week, and market sentiment remains strong with regard to both economies.  Will the pound make a move  towards the 1.70 level, or will we see a  long overdue correction  in favor of  the dollar? The answer to that will depend to a large extent on how  the strength of  these week’s key UK events,  Services PMI and Manufacturing Production.

Further reading:

• For a broad view of all the week’s major events worldwide, read the USD outlook.
• For EUR/USD, check out the Euro to Dollar forecast.
• For the Japanese yen, read the USD/JPY forecast.
• For the Australian dollar (Aussie), check out the AUD to USD forecast.