Time for Correction – Can the $1.30000 Level Hold The Sterling After A Sharp Climb?

The Pound Sterling is set to register the first week of closing in the green, after a slew of “more-positive-than-expected” data readings that have helped dispel the negative post-referendum bias. Despite trading lower on Friday, the British Pound is believed to shake off any fears of further rate cuts from the Bank of England in the near term, as the impact of the Brexit vote may not be as severe as anticipated.

To round up a week of data releases, earlier today the Office for National Statistics (ONS) published U.K Public Sector Net Borrowing for July, reporting a surplus of £1 billion as the government earned a huge amount of tax. However, last month’s surplus was still lower than a £1.2 billion surplus in the same month last year and below forecasts of a £1.6 billion surplus.

Last month, tax receipts reached £61.8 billion, up 3.4% on a year-on-year basis, including 8.4% increase in corporation tax receipts to £7.5 billion, and a 1.9% advance in income tax payments to £18.9 billion.

Central government spending in July 2016 rose by 1.4% to £58.4 billion compared to July 2015. In the current fiscal year starting in April, the government has borrowed a total of £23.7 billion, £3 billion lower than at the same point last year.

David Gauke, the chief secretary to the Treasury, said: “With the public finances in surplus in July, our economy starts from a position of strength to face any economic turbulence following the vote to leave the EU”.

Before that, in a separate report on Thursday, the ONS announced that U.K retail sales were up 1.4% in July following a 0.9% fall in the month before, beating consensus eestimates of a 0.4% increase. On a year-on-year basis, retail sales surged 5.4%, also topping forecasts for an increase of 3.9%. Retail sales are central to the UK’s service sector which accounts for more than 80% of the UK economy. Therefore, the Sterling immediately skyrocketed about 100 pips to reach two-week highs at 1.31713 against the greenback after the news.

Out in the US, dark clouds are hovering over the prospects of the next rate hike seemed to have cleared away partly, after New York Fed President William Dudley, in an interview on Thursday, reiterated his hawkish message delivered earlier this week that the central bank could possibly hike rates in September. San Francisco Federal Reserve Bank President John Williams also echoed his colleague’s views, saying that waiting too long could be costly for the economy.

The market will not receive any further clues on the Fed’s thinking until next Friday, August 26 when Fed Chairwoman Janet Yellen speaks at a meeting of global policy makers in Jackson Hole, Wyoming. The U.S. dollar index, which measures the greenback’s strength against major currencies, is up 0.33% at 94.48 in trading today.


Fig: GBPUSD H4 Technical Chart

GPPUSD is hovering around the 1.30925 level. This level had been broken yesterday following encouraging news on the fundamentals side, and is now coming back into play as a support zone. While the stochastics are heading down into the oversold zone, prices have not yet broken though the MAs placed below the price action as yet. Recent candles are getting bearish, with long upper shadows, which indicates a strong bearish move may be in the making. We expect the currency pair to fall further as investors take profit ahead of the weekend.

Trade suggestion

Sell Stop at 1.30500, Take profit at 1.30000, Stop loss at 1.30925

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