GBP: Gains may be Detached From Harsh Reality

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UK PMI preliminary data for April were grim and indicated full depth of the shock caused by coronavirus. Looking forward, the data suggests that economic recovery in the UK may take longer than in other developed countries. Besides the obvious negative impact of lockdowns, we have to add uncertainty related to Brexit trade talks. This takes away growth potential from GBP. Short-term price dynamics suggests demand for USD continues to dictate the path of GBPUSD.

Like in the Eurozone, UK figures went into a steep decline in April indicating an extremely weak economic momentum. Starting from April the economic figures capture the full effect of lockdown which was somewhat late reaction of the government to the threat. Markit composite PMI (combining manufacturing and non-manufacturing activity) fell to a record low of 12.9 points missing consensus of 31 points. Basically, PMI at 12.9 points means that about 81% of the firms surveyed reported deterioration in economic conditions.

Also note that diffusion indexes such as PMI is a good predictor only with more or less stable GDP dynamics, however, in a downturn, the forecast horizon declines sharply. A good example of this is China, where March manufacturing PMI bounced to 52 points, however it only meant that the firms reported that economic conditions were slightly better compared to February.

Rabobank currency strategist Jane Foley said that economic headwinds and uncertain outcome on the trade talks with EU sets the stage for GBP decline by 4% against USD to $ 1.19. However, if the deal is reached without a delay GBP may rise to $ 1.26 before this year is out.

The short-term technical setup on GBPUSD is as follows:

The short-term downtrend has been in the making for about a week which started after USD general sell-off fizzled out leaving pair without buying support at 1.26500. Previous attempts to go beyond the upper bound of the channel were made with little effort, the last weak attempt suggests that the pair may return to the channel and will test the nearest support at 1.22500 and 1.2200.

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