Bullish Structure Remains Worthy of Expectation If It Doesn't Break New Lows in the Range Again

Forex

Central Bank

Summary:

The GBPUSD gathered bullish momentum, rising above its highest level in nearly two weeks at 1.2770 after UK PMI data for January showed a pickup in growth momentum. However, another blow to UK factory orders and investment program cuts put pressure on the GBPUSD's upside momentum.

BUY GBPUSD

Close Time

CLOSED

1.26380

Entry Price

1.30340

1.25800

1.36936 +0.00101 +0.07%

40.2

Pips

Profit

1.25800

1.26782

Exit Price

1.26380

Entry Price

1.30340

Fundamentals

The UK manufacturing PMI rose from 46.2 to 47.3 in January, a nine-month high. Services PMI rose from 53.4 to 53.8, an 8-month high. The composite PMI rose from 52.1 to 52.5, a 7-month high.

Chris Williamson, the chief business economist at Standard & Poor's Global Market Intelligence, noted that growth in UK business activity "accelerated for the third consecutive month". He described it as a "promising start" to the year.

The UK economy is expected to grow at a quarterly rate of 0.2% after a tepid performance in the fourth quarter, thus "emerging from recession and showing signs of renewed momentum", according to the survey data.

However, Williamson emphasized the important implications of this unexpected growth momentum in January, which could lead the Bank of England (BOE) to reconsider the timing of any expected rate cuts.

This reassessment is particularly relevant given that the Red Sea supply disruptions have reignited inflationary pressures in the manufacturing sector. Williamson said that inflation is expected to remain stubbornly in the 3-4% range in the short term.

The GBPUSD surged above 1.2770, boosted by upbeat UK PMI data. As investors lowered their expectations for easing from the BOE, it had been expected at one point that interest rates would be cut by less than 100 basis points within the year.

Swap contracts corresponding to the central bank meeting show this expectation, which is much lower than the roughly 150 bps expected by the end of 2023, equivalent to six 25 bps rate cuts. A short week ago, the market was still betting on a 130 basis point rate cut.

This change since the beginning of the year accelerated further last week as UK inflation in December was higher than economists had expected. Meanwhile, rapidly cooling payrolls and weaker-than-expected retail sales data underscored the challenges facing the economy.

The problems facing UK factories come shortly after another piece of survey data revealed that UK manufacturers are again reducing orders and scaling back investment plans.

The Confederation of British Industry's (CBI) quarterly new orders index fell to -13 in the three months to January, the lowest since July 2020. The measure of new order expectations remained unchanged at -1 from the previous survey in October.

Investment in tangible assets such as construction, machinery, and equipment is expected to fall sharply in the year ahead, and investment in innovation is also expected to weaken. Anna Leach, deputy chief economist at the CBI, said, "Manufacturing conditions deteriorated unexpectedly at the start of this year, with output falling and orders hitting their lowest level since the new crown epidemic in 2019."

Bullish Structure Remains Worthy of Expectation If It Doesn't Break New Lows in the Range Again_1

Technical Analysis

The GBPUSD rebounded strongly above the threshold of 1.2700 on Wednesday, maintaining a bullish bias, but the overall structure has a neutral momentum and did not come out with a clear direction. Another decline cannot be ruled out, but the downside will first be supported by the bottom of the range at the level of 1.2596, and then the bottom of Wave 4 at 1.2499.

On the bright side, if the bulls hold on to the 1.2784 resistance, it would indicate that the consolidation pattern is complete. A further rebound should then be seen, and a break above 1.2826 would take us straight to the end of the upward impulse waves at 1.3034, provided that the intraday close must break above the 1.2720 level to send a clear bullish signal.

From a broader perspective, the trend from the intermediate-term top at 1.3141 is seen as an adjustment pattern to the uptrend that started at 1.0351 (2022 low). The rise from 1.2036 is seen as the second phase in progress. The upside should be suppressed by 1.3141 to form the third wave pattern of the pattern. At the same time, a break below the 1.2499 support level would indicate that the medium-term downward momentum has started, once again into the 2022 low at 1.2075. It is recommended to buy the dips.

Trading Recommendations

Trading direction: Long

Entry price: 1.2638

Target price: 1.3034

Stop loss: 1.2580

Deadline: 2024-02-07 23:55:00

Support: 1.2649, 1.2610, 1.2589, 1.2551

Resistance: 1.2747, 1.2785, 1.2827, 1.2844

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