Summary:

• UK Manufacturing PMI rises to 56.3 vs 55.8 exp
• Post-release GBPUSD hits 3-week high; EURGBP falls to lowest since June
• BoE expected to raise rates tomorrow for 1st time in a decade

The UK manufacturing sector continues to perform well, with the latest data coming in better than expected. The PMI index for October rose to 56.3 against consensus forecasts for a reading of 55.8 after a previous reading of 55.9. The number is the third highest of the year and provides further evidence that the sector continues to perform well despite the looming threat of Brexit. 

 

 The PMI reading remains strong and well above its long run average. Source: IHS Markit

Even though this release is impressive it pales in comparison in terms of importance to the market to tomorrow’s BoE rate decision. The central bank is expected to raise rates for the first time in more than a decade and with their quarterly inflation report also scheduled to be published “Super Thursday” could be a huge event for the pound. 

The rate hike of 0.25% is now widely discounted with a more than 80% probability given that it will occur according to derivatives markets. This is largely due to the MPC adopted a deliberately hawkish stance of late and telegraphing that the move is coming.  Therefore, assuming they do hike, this is unlikely to be the biggest market mover of the event and traders will likely look to the voting pattern as well as the language used in the accompanying statement and inflation report forecasts to determine whether this is a hawkish or dovish hike.  

 The GBPUSD remains in a longer term uptrend heading into the BoE rate decision. Source: xStation

The pound has been making steady gains this week ahead of the event and the GBPUSD pair has hit a 3-week high this morning in moving back above the 1.33 handle. The market is now towards the upper bound of its recent range close to 1.3340 and this could be an important resistance level to watch going forward. On the downside A rising trendline going back to March was respected last week and this is something to keep an eye on. Recent lows around 1.3065 may also provide support if the market does dip lower but a break below there would pave the way for steeper declines. 

Whilst the GBPUSD is the most widely traded GBP pair traders may opt to stay out given the US side has several major releases in the coming days (ADP, ISM, FED, NFP). Therefore the EURGBP may be seen as more attractive and this market also sits at a potentially key level. Price briefly dipped to its lowest since June this morning following the PMI release and the market is now at a potentially pivotal support level. 0.8725 has provided a floor in recent months with any attempts to push price below here being met with some strong buying. Should this level hold once more then there is the scope for another move higher with 0.8865 the first level to look for possible resistance.

 The EURGBP is close to potentially key support around 0.8725 following the release. Source: xStation

There does also appear to be a possible head and shoulders setup forming with 0.8725 the neckline. Should this level break and see a daily close below then there could be a sustained drop ahead, with GBP looking to recover some more of the losses seen since last summer’s Brexit vote.