Will The BOE Rescue The Sterling? Rising Shorts Suggest Otherwise

In data released today, both the U.S and U.K reported contraction in manufacturing activity but the greenback proved to be a better survivor with GBPUSD heading down by 0.6 percent compared to the last close.

Market research group Markit on Monday reported that U.K. manufacturing PMI fell to a seasonally adjusted 48.2 in June from a reading of 52.1 the month before. This was the lowest level since early 2013 and disappointed investors as the number indicated that U.K manufacturing shrank even more than in the initial report released on July 22, that had shown the PMI dropping to 49.1 in July.

Since Britain voted to leave the European Union on June 24, the Sterling has plunged more than 11 percent in July, posting its third consecutive monthly drop against the U.S dollar.

Hedge funds and other large speculators are betting against the British Pound the most amid speculation that the Bank of England will cut interest rates for the first time in more than seven years in the next meeting scheduled this Thursday. According to U.S. CFTC data, GBPUSD short positions outnumbered bullish wagers by 80,572 contracts last week.

After the BOE surprised markets by leaving policy unchanged in the July meeting, markets are pricing in additional stimulus measures to be deployed on August 04. 49 out of 51 economists in a Bloomberg survey forecast that BOE policy makers will cut the key interest rate from a record-low rate of 0.5 percent which has been maintained since March 2009.

In the U.S, even after data showed that manufacturing activity in the U.S. fell more than expected in July, the dollar held onto gains against other major currencies on Monday, and the Pound is not an exception. The Institute for Supply Management said its index of manufacturing activity dropped to 52.6 last month from June’s 53.2 and fell short of analysts’ forecast at 53.0.

Two Federal Reserve officials, Dallas Fed President Rob Kaplan and New York Fed President William Dudley, in separate speeches, gave out signals of a likely rate hike in September, before the election in November. However, markets are pricing in only a 18% chance of rate hike at the Sept. 20-21 meeting, especially after the weak second-quarter GDP reading released late last week that showed only 1.2% growth in the quarter ending in June.

GBPUSD is expected to be volatile in a wide range over the next couple of days as a batch of U.K data is due to be published beginning with Construction PMI on Tuesday followed by the Service PMI report on Wednesday before the highly watched BOE meeting on Thursday.

GBPUSD

Fig: GBPUSD H4 Technical Chart

GBPUSD is trading in a triangle pattern with lower highs and higher lows. A battle has begun between the buyers and sellers but neither the buyers nor the sellers are pushing the price far enough to establish a clear trend. However, the parabolic sar band has appeared above the price action and is generating a sell signal. The RSI (14) is heading down and is likely to move past the dividing line between bullish and bearish forces.

Trade suggestion

Sell Stop at 1.31870, Take profit at 1.31328, Stop loss at 1.32360

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