It’s been a frustrating 1-1/2 month for GBP/USD bears as the pair continues to strengthen despite weak economic data, Brexit uncertainty and May’s call for UK snap elections.
UK Q GDP – is the bad news already priced-in?
Pair’s rally from the low a low of 1.2109 (Mar 14 low) has been partly fuelled by broad based US dollar weakness and partly due to expectation that Theresa May will secure a larger majority in the June 8 general election.
However, on the way higher, the British Pound has totally ignored the sharp rise in inflation and the resulting pressure on real incomes. There is evidence that UK consumer spending has taken a hit. The resilience in Sterling suggests much of the negative news has been priced-in.
Consequently, the preliminary UK GDP release could turn out to be a non -event for the markets, unless the number prints way below the estimates. The UK Q1 growth rate is seen slowing to 0.4% q/q from the previous quarter’s 0.7% reading.
A weaker-than-expected figure could yield a technical pull back, given the overbought conditions on the intraday charts. Strong support at 1.26 could be put to test over the next few days.
On the other hand, a positive surprise would shake out a few more GBP bears, thus opening doors for 1.30 handle. There is consensus in the market that Pound’s sharp rally this month is the result of the unwinding of the shorts.
GBP/USD Technical Levels
The pair jumped above 1.29 handle in Asia and was last seen trading around 1.2910 levels. The unwinding of shorts could gather pace if the spot breaks above 1.30, thus opening doors for 1.3119 (June 2016 low). On the downside, failure to hold above the weekly 50-MA level of 1.2845 could yield a sell-off to 1.2631 (weekly 5-MA).