Manufacturing PMI at Lowest Level on the Year
The Markit/CIPS UK Manufacturing PMI reading for July came in at 55.4, the lowest print this year so far. Forecasts called ofr a reading around 57.2. June’s print was also revised lower to 57.2 from 57.5. UK July’s reading not only bucked but completely reversed the improvements in the manufacturing PMI since March (55.8).
Monetary Policy Implication
A reading above 50 reflects expansion in the sector, but the drop to the lowest of the year suggests the growth in the UK could be easing in Q3. If so, the BoE might not be able to raise rates in 2014. Even if growth is in-line, the bank has expressed concern of wage growth, which is key for domestic demand, which in turns drives a big part of the economy. Essentially, traders are pricing in a rate hike outside of 2014, and the soft Manufacturing PMI data simply nudged the GBP/USD lower on its already persistent bearish path.
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The 4H chart shows that the pair was already bearish since mid-July when it retreated from a fresh high on the year at 1.7190. The soft manufacturing PMI simply made the tracks smoother for this bearish train that has been persistent and without any significant retracement.
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When you look at the daily chart, you see that today’s soft UK data is dragging the pair below key rising trendlines in 2014. It is also breaking the 100-day SMA, and dragging the daily RSI below 30, which is a sign that there is bearish momentum, but also a sign that cable might be seen as oversold in the short-term.
The bearish break down opens up the 1.67 lows from May/June. To the upside, if there are any significant retracements after today’s NFP, we should watch the 1.70 level for resistance.
The NFP is the last key event risk this week for the USD. Conventional wisdom says strong print = strong USD. A strong print might be something above 250K. A weak print = weak USD. A readying below 200K should be considered weak.
A strong USD can drag GBP/USD below 1.68 toward the 1.67 handle without much retracement. However, a soft USD scenario opens up a possible consolidation, where GBP/USD has upside in the short-term to 1.70.
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