Could GBP/USD bottom out soon?

GBP/USD shows tentative signs that the bulls might be coming back as haven demand for the dollar falls amid the stock market rally. Here we have discussed two alternative scnarios for the cable...

The dollar extended its loss with the DXY turning lower in reaction to the latest US jobs data showing continuing claims remained higher than expected. Even the downbeat British pound managed to come off its lows against the buck, after starting the day decisively lower. Sterling was initially under pressure after the BoE’s Governor Andrew Bailey had said the bank isn’t excluding the idea of sub-zero interest rates as it tackles the economic impact of Covid-19, and after data showed inflation fell to its lowest since 2016 the day before. But is (some of) the negativity priced in now?

Earlier, we had better-than-expected UK flash PMI data, which reduced some pressure on the cable. The rebound in PMI data was not eye catching by any means because both indices remained below the boom/bust level of 50.0, but it was a marked improvement from the prior month (see below). So, hopefully activity might be picking up more sharply than anticipated. If so, the pound could benefit.

Stocks off lows

What’s more, sentiment towards risk assets have turned positive of late, though today the markets had started sharply lower on the back of escalating tensions between US and China after Trump accused that Xi Jinping is behind a “disinformation and propaganda attack” on US and Europe in a series of tweets last night. However, ahead of the US opening bell, European stocks and US futures had recovered a good chunk of those losses. Thus, with risk still being positive, demand for haven dollar is falling and this could be positive for the GBP/USD pair.

US data recap:

  • Jobless claims 2.44m, slightly above 2.40m expected. However, it was lower compared to last week's 2.98m print.  
  • BUT continuing jobless claims rose to 25.1M vs 22.8M previous and 24.8M expected
  • Philly Fed -43.1 in May vs -40.0 expected
UK data recap:
  • Flash Manufacturing PMI 40.6 vs. 35.1 expected and 32.6 last
  • Flash Services PMI 27.8 vs. 24.1 expected and 13.4 last
  • CBI Industrial Order Expectations -62 vs. 50 expected and -56 last
Tentative bullish technical signals

From a technical point of view, the trend on the GBP/USD is clearly bearish. BUT there are tentative signs that the bulls might be coming back. The fact that rates failed to hold below the old low at 1.2166 is technically bullish as it shows the bears’ lack of conviction. Thus, for the bear trend to resume rates need to break back below this hurdle. What’s more, a bearish trend line has broken down. Thus, if the cable were to go back above yesterday’s low of 1.2220ish and hold there, then then the bulls might target the liquidity above 1.2305 next. So, tactically, we are prepared for both bullish and bearish scenarios for the cable, as the chart shows:

Source: ThinkMarkets and TradingView