Summary:
- GBPUSD hit a 2018 low yesterday near 1.33
- UK retail sales bounce back in April
- FOMC minutes slightly dovish and may also aide a recovery
The GBPUSD has been in a near constant state of decline these past few weeks as the BoE performed a pretty dramatic U-turn on a May hike and rising US yields boosted the buck. Cable fell to its lowest level of 2018 during Wednesday’s session, and flirted with printing a 1.32 handle with the low seen at 1.3304. However, there have been a couple developments since the low that could sow the seeds of a recovery, with first the FOMC minutes showing a possible dovish shift before this morning saw a strong bounce back in UK retail sales.
GBPUSD hit its lowest level of the year yesterday near prior support around 1.3300. The pair has dropped over 1000 pips in recent weeks. Source: xStation
The wording in the FOMC minutes was subtle but a reference to a temporary period of inflation modestly above 2% being consistent with the committee’s symmetric inflation objective seems to suggest that they are not too concerned with rising prices. This could mean that even if inflation rises further and moves above target, then the rate-setting members will refrain from a faster pace of tightening. The initial market reaction to this was muted in the FX space but there was a notable fall in yields with the Tnote ending the day at a 2-week high.
Turning our attention closer to home, this morning’s UK retail sales release had a pretty clear initial reaction in GBPUSD, with the pair jumping by around 40 pips in the following minutes. It is worth pointing out that the pair was already on the rise ahead of the release and this could be seen to suggest a leak of the data somewhere.
GBPUSD jumped higher following the release and moved back above the 1.34 level. Source: xStation
The data itself showed a rise of 1.6% m/m for April, which was an impressive recovery compared to the 1.1% contraction seen in weather-effected March (revised higher from -1.2% last time out). One of the chief contributors to the bounce back was petrol sales, which jumped by 4.7% on the month from a decline of almost 7% in March. Whilst the recovery is warmly welcomed it should be pointed out that the bigger picture remains not so great. Removing monthly volatility, the combined 2-month period encompassing both March and April showed a general growth of 1.3% compared to 2.9% for the same March-April period last year.
While the GBPUSD rate has been in a steady state of decline for the past month, the UK100.cash has been moving strongly higher, with the inverse correlation which became so apparent following the Brexit vote increasing once more. The correlation has a solid economic rationale behind it seeing as many FTSE companies such as miners and Oil majors produce their revenues in USD and therefore benefit from a lower GBPUSD rate when reported in GBP terms. An approximate guid shows that almost 75% of revenues for the index as a whole is generated in non-GBP currencies.
The push higher in the UK100.cash over the past month has coincided with a large move lower in GBPUSD (axis inverted). A recovery in GBPUSD could be seen to impart downwards pressure on the UK100.cash. Source: xStation
The market made a series on new record highs at the end of last week and beginning of this but an evening star formation has developed and could be seen to indicate a possible reversal. Unfortunately, as price failed to close back below 7778 (previous closing highs) last night the latest push higher can’t yet be called a false breakout. Having said that, as long as the high around 7903 remains in tact then a pullback is possible with the 23.6% and 28.2% fibs at 7655 and 7501 possible targets. A daily close below 7778 would provide further confirmation that price could be set to move lower.
An evening star has formed on the UK100.cash and a daily close back below 7778 would further support a reversal. Source: xStation