GBPUSD Ignores Subdued U.S data, Weighed by Potential BOE Rate Cut – Longs Still Profitable

British Pound snapped yesterday’s gains versus the U.S dollar after the Bank of England telegraphed a potential rate cut later this year. Meanwhile, faltering US retail sales and producer prices in August didn’t provide much support on the currency pair.

After cutting its benchmark interest rate and unleashing a quantitative easing program worth £435 billion ($576 billion) last month to cushion an economic downturn following the Brexit vote, the BOE left unchanged its key interest rate at a record low 0.25% and made no further changes to the size of its QE program on Thursday.

Given the recent data that reported the U.K economy performing stronger than expected, BOE officials were also unanimous on continuing with the plan of purchasing gilts and corporate bonds, and offering ultra-cheap loans to banks. However, nine members of the Monetary Policy Committee noted that near-term data could not be used to draw inferences for longer-term forecasts. Thus, there is a chance for a further cut in interest rates in 2016, should the economy weaken.

Earlier on Thursday, the Office for National Statistics reported that retail sales fell by 0.2% in August compared to July, translating into a 6.2% advance compared to the same period last year. Today’s data reported a smaller decline than the 0.4% fall expected, after July’s sales figures had been revised upwards, marking the strongest annualized rate of growth for the month of July since 2001.

In the U.S, a chain of economic data came out earlier today. But most of them failed to generate  positive signals. U.S. wholesale prices were reported to be flat in August, mostly because of sharp declines in the cost of food and gasoline. This consequently dampened retail prices for the same goods and dragged the overall retail price index down by 0.3%.

Sales at U.S. retailers fell for the first time in five months. Not only were department stores suffering losses due to the robust of online sales, internet sellers were also hit for the first time since the start of 2015. Only grocers and clothing outlets recorded an increase last month. Supported by back-to-school demand, sales at apparel stores climbed the most by 0.7%.

Core retail sales, which exclude automobiles, ticked lower by 0.1% in August after falling by 0.4% one month earlier.

In a separate report, the Federal Reserve announced that output at American manufacturers fell 0.4% in August. The consensus forecast had called for a decline of 0.2%. The results are consistent with the ISM’s factory survey for August, which had signaled a contraction, and also worsened the outlook for producers, after a private survey of purchasing managers last week showed that manufacturing contracted in August.

The softer than expected data from the US, however, failed to lend support to the GBP and GBPUSD was trading down 0.2% in late morning US trade.

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Fig: GBPUSD H4 Technical chart

GBPUSD has been on a decline for more than a week, with the price action moving from the upper boundary of the upward trading channel straight to the lower boundary of the trading channel and also breaking through the short and long term MA’s in the process. The pair eventually fell out the range and has failed to crawl back. However, the down move is now facing a strong zone of support marked by the downward sloping trendline that connects previously registered lows of significance. Further declines are expected but a bounceback may occur when the market attempts a test of the red trendline.

Trade suggestion

Buy Limit at 1.31650, take profit at 1.32100, stop loss at 1.31300

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