Article by ForexTime

The GBPUSD downturn may not be over quite yet. Although the UK economy remains arguably the fastest growing of the Western economies and a UK interest rate hike has far from been priced into the sterling, the Cable currently looks very bearish. Not only is the GBP losing momentum against a resurging USD, but investor attraction towards the GBP weakened substantially following signs UK manufacturing growth is slowing down due to EU economic problems limiting manufacturing demand.

UK Chancellor George Osborne made headlines on Friday for stating that EU economic problems pose the greatest threat to the UK economy, and if we have any further indications from Tuesday’s Industrial Production and Manufacturing Production release that EU economic woes are having a detrimental impact on UK sector growth further GBPUSD selling can be anticipated. The Cable has currently found support around 1.5959 but a downside break below the 1.5920 support level would open the doors for the GBPUSD to trade below 1.59 for the first time since November 2013.

The European Central Bank (ECB) left monetary policy unchanged last Thursday, but the Eurodollar declined by over 200 pips last week and more losses look probable in October. Already today, poor German data has continued to quash faint optimism Europe’s largest economy could return to consistency, with German Factory Orders contracting by 5.7% on a monthly basis in August. This followed an unexpected manufacturing contraction from Germany only days ago, and could lead to speculation the German economy might again contract in Q3.

The EU economic sentiment continues to weaken as fears over stagnant economic growth and low inflation remain. While increased concerns over Germany are only going to alert the bears and provide validity to ECB President Mario Draghi’s comments “that the fundamentals for a weaker exchange rate are better now”. On the other hand, investor attraction towards the Greenback remains strong and the Federal Reserve will conclude QE at the end of the month. As long as the divergence in economic sentiment between the US and EU remains strong, the Eurodollar is looking to conclude the month between 1.22 and 1.23.

Also this week, the latest FOMC minutes are released where investors will continue to be searching for clues as to a possible timeframe for the first Federal Reserve rate increase. Following the US adding 248,000 jobs to its economy in September and the unemployment rate falling to its lowest level (5.9%) in six years, pressure is on Janet Yellen to provide reasons why the US labor market is still underperforming, otherwise investors are going to continue to price in a rate increase sooner rather than later. Previously, the Federal Reserve seemed to have been focused on the labor markets when discussing rate increase, but I think the Fed’s position will change fairly soon.

The Bank of England moved focus away from employment statistics some time ago and adopted the phrase “slack within the economy” when discussing a possible timeframe as to when to raise rates. I think the Federal Reserve will follow this approach and I am expecting the tone of language from the Fed to change in the coming months. I am expecting the Federal Reserve to indicate it is keeping an eye on how the economy is coping without QE and analyzing other forms of economic data, such as consumer expenditure and housing statistics when discussing a timeframe for a rate rise.

For as long as the EURUSD continues to devalue, I will remain bullish on the USDCHF, even though I am wondering if the legs on the USDJPY bull run are tiring. The USDJPY finally progressed to 110 last week, but pulled back sharply after failing to reach 110.250. After the strong US NFP, the pair failed to make it up to 110 and it is strongly expected Tuesday’s Bank of Japan (BoJ) Monetary Statement will continue to suggest no further stimulus will be added anytime soon. This should lead to JPY strength and I remain unconvinced the Fed will be pressured into monetary tightening. Therefore, there is potential for this pair to pullback again this week. Possible support can be found at 109, 108.688 and 108.290.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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