Date: 20 Dec 2018

As the countdown to Brexit continues with only 100 days to go, UK is fast approaching a decisive moment with UK Prime Minister Theresa May facing tough hurdles in her attempt to win parliamentary support for her deal to leave the EU.

Members of Parliament (MPs) were due to vote on Mrs May’s Brexit deal on December 11 but the prime minister cancelled the vote the day before, acknowledging that she faced a hefty loss. Mrs May has now scheduled the debate on her Brexit deal on the week of January 7, with the vote planned for the week of January 14.

The consumer price index (CPI) in the United Kingdom fell to 2.3% year-on-year in November, compared to 2.4% registered in the previous month, but consistent with analysts’ estimates. It was the lowest CPI since March 2018, driven by a slowdown in the cost of transport, food and non-alcoholic beverages, recreation and culture. The purchasing power of GBP is dragged down by inflation. The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as positive for the GBP, while a low reading is seen as negative.

The US Federal Reserve (Fed) raised interest rates by 25 basis points (bps) yesterday as widely expected by market analyst and said it was keeping the essence of its plan to tighten monetary policy intact even as central bank officials said they would likely slow the pace of further rate increases in 2019. A rate hike tends to boost the USD, as it is understood as a sign of healthy inflation. A rate cut, on the other hand, is seen as a sign of economic and inflationary woes and, therefore, tends to weaken the USD.

The Housing starts in the United States advanced 3.2% compared to a month earlier registering 1,256K in November, and well above analysts’ forecast of a 0.2% drop to 1,225K. Starts moved up in the Northeast and the South but fell in the Midwest and the West. The multi-family segment rose while single-family homebuilding reached the lowest level since May 2017. The figures include all private and publicly owned units. It indicates the movements of the US housing market. Generally, a high reading anticipates positive for the USD, whereas a low reading is seen as negative.

Since the beginning of 2018 until last Wednesday close, the GBPUSD remains negative with a loss of over 6.5% but since the start of December continues below water with more than a 1.0% loss. Nonetheless, since the beginning of the week the currency pair is managing to stay afloat with a minor gain of 0.31% and on the daily time-frame closed slightly in the red with a loss of 0.21%. Furthermore, the GBPUSD remains in a bearish phase since early November.

During last Friday session, the currency pair initially rose with a narrow range but found enough selling pressure 1.2678 to trim all of its gains and closed near the low of the day, however, managed to close within Tuesday range, which suggests being slightly on the bearish side of neutral.

The stochastic is showing bullish momentum although is still below the 50 midline.

The MACD histogram (OsMA) indicator is setting higher lows while the price is making lower lows, signs of potential bullish divergence. In this case, the bullish divergence suggests a possible trend reversal to the upside.

In mid-December, the GBPUSD managed to make a new year-to-date low at 1.2475 as investors continue to wait for the light at the end of the tunnel regarding the Brexit deal. Yesterday price action shows a bearish momentum accompanied with rising volume, potentially signalling the end of the upward correction and the continuation of the downward trend toward 1.2475. The currency pair seems to have found significant resistance near the 23.6 Fibonacci retracement at 1.2640.

 

GBP/USD Daily Candlestick Chart

GBP/USD Daily Candlestick Chart

 

Market Events to Watch:

 

Thursday, December 20 at 09:30 GMT (04:30 ET): The UK National Statistics is scheduled to release the retail sales year-on-year in November, which are estimated by marker analysts to decrease to 1.9% compared to 2.2% registered in the previous month. Generally, a high reading can be seen as positive for the GBP, while a low reading is seen as negative.

Thursday, December 20 at 12:00 GMT (07:00 ET): The Bank of England (BoE) is scheduled to release the monetary policy summary, Bank of England Minutes and the interest rate decision, which is expected by market analysts for the rate to stay unchanged at 0.75%. If the BoE is hawkish about the inflationary outlook of the economy and raises the interest rates which is positive for the GBP. Likewise, if the BoE has a dovish view on the UK economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative for the GBP.

Friday, December 21 at 09:30 GMT (04:30 ET): The UK National Statistics is scheduled to release the Gross Domestic Product (GDP) year-on-year in the third quarter, which is expected to come in unchanged at 1.5%, the same as registered in the previous period. The GDP Annualized is a gross measure of market activity because it indicates the pace at which a country’s economy is growing or decreasing. Generally, a high reading or a better than expected number is seen as positive for the GBP, while a low reading is negative.

Friday, December 21 at 13:30 GMT (08:30 ET): The US Bureau of Economic Analysis is scheduled to release the Gross Domestic Product (GDP) Annualized in the third quarter, which is expected to come in unchanged at 3.5%, the same as registered in the previous period. The GDP Annualized is a gross measure of market activity because it indicates the pace at which a country’s economy is growing or decreasing. Generally, a high reading or a better than expected number is seen as positive for the USD, while a low reading is negative.

Friday, December 21 at 13:30 GMT (08:30 ET): The US Census Bureau is scheduled to release the durable goods orders in November, which is expected to rise to 1.2%, comparing to the -4.4% registered in the previous period. The durable products often involve large investments they are sensitive to the US economic situation. The final figure shows the state of US production activity. Generally, a high reading is positive for the USD, while a low reading is negative.

Friday, December 21 at 13:30 GMT (08:30 ET): The US Bureau of Economic Analysis is scheduled to release the Core Personal Consumption Expenditure – Price Index year-on-year in November, which is expected to rise to 1.9%, comparing to the 1.8% registered in the previous period. The “Core” excludes seasonally volatile products such as food and energy in order to capture an accurate calculation of the expenditure. It is a significant indicator of inflation. A high reading is positive for the USD, while a low reading is negative.

 

Written by Hugo O’Neill, External Analyst

 

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