GBPUSD: Choice Space of Bull/Bear Ratio Returns to Starting Point, It's Not Recommended to Bet But Focusing on Strategic Layout

Forex Market Inflation and Recession Central Bank Policy Trends Economic Trends

Summary:

UK GDP improved in January, but industrial and manufacturing production deteriorated. The GBPUSD advanced for the third day in a row amid a continued decline in the U.S. dollar. The overall optimistic UK GDP data for January favored the pound and provided support ahead of the release of the U.S. non-farm payroll data.

Sell GBPUSD

End Time

CLOSED

1.22900

ENTRY PRICE

1.16510

TGT PRICE

1.24500

SL PRICE

1.23080 +0.00220 +0.17%

170

Points

Profit

1.16510

TGT PRICE

1.22730

CLOSING

1.22900

ENTRY PRICE

1.24500

SL PRICE

Fundamentals

In the early European session on Friday, the GBPUSD attracted some buying on the dips and rose above the three-day high of 1.2000 level in direct reaction to the better-than-expected UK monthly GDP data.

The UK Office for National Statistics reported that the economy grew by 0.3% in January, compared to expectations of 0.1% growth, after contracting by 0.5% in the previous month. This largely offset the release of disappointing UK manufacturing and industrial production data. In turn, these data were reflected in the financial markets and were seen as providing some support to the pound. On top of this, the U.S. dollar continued to retreat from its three-month highs, providing additional support for the GBPUSD.

UK GDP growth in January suggests that the UK economy is in better shape than expected a few months ago. This is further evidence that the UK economy remains resilient in the face of a tightening cost of living and widespread industrial unrest. However, beneath the surface, the UK economy appears to be on a weaker footing.

Data shows that while the UK economy grew by 0.3% in January, manufacturing output fell by 0.4% and construction fell by 1.7%, suggesting some underlying weakness due to high inflation and interest rates.

Despite the rebound in UK GDP in January, this means little to Bank of England policymakers, who are more concerned about high inflation. The potential volatility of the data itself suggests that UK GDP may have actually been flat. In addition, falling gas prices mean that any recession is likely to be very mild at this point and could technically be avoided. The next test for the Bank of England will be whether the wage growth data due out next week shows significant signs of a top.

On the interest rate front, the BoE always seems to lag developments rather than actively fight high levels of inflation, which has raised concerns that its monetary policy may be lagging behind the yield curve. The Bank is expected to raise rates by 25 basis points at its March meeting, meaning the monetary policy will continue to put depreciating pressure on the pound.

Looking ahead, the increase in labor strikes in the UK in February is likely to reduce economic growth, so the positive performance in January is unlikely to be sustained and a recession remains a possibility.

In terms of the market, higher-than-expected weekly jobless claims released in the U.S. on Thursday suggested that the labor market is starting to show signs of weakness and forced investors to re-evaluate the possibility of a (weaker) 50 basis point rate hike at the Federal Open Market Committee meeting to be held on March 21-22. This was further reinforced by the retreat in U.S. Treasury yields and continues to put pressure on the U.S. dollar. Meanwhile, USD bulls failed to take any respite from the prevailing safe-haven environment, as depicted by the sharp decline in global equity markets.

However, technical graphics suggest that investors may not continue with more aggressive bullish bets in the deep pullback in GBPUSD after Wednesday's sharp drop, nor will they prepare for more recovery extensions from the U.S. non-farm payrolls report. This is because technical graphics are back to the starting point of the bull-bear game, with a fairly balanced share of room for options in any direction, making it not worth betting on.

The market is currently focused on the much-anticipated U.S. February non-farm payrolls data, which will be released later in the morning New York session and will play a key role in influencing the Fed's policy outlook. In turn, this will drive demand for the U.S. dollar and provide fresh directional momentum for the GBPUSD.

GBPUSD: Choice Space of Bull/Bear Ratio Returns to Starting Point, It's Not Recommended to Bet But Focusing on Strategic Layout_1

Technical Analysis

The GBPUSD continued to gain support in a narrow range of 1.1900-1.1940 from late yesterday's New York session. It continues to trade sideways as investors are awaiting the U.S. February non-farm payroll data.

Mixed signals from the U.S. labor market have left investors confused, and the USD failed to maintain its recovery momentum, which improved demand for U.S. bonds and triggered a sharp rebound in the GBPUSD to a watershed point for the bull-bear options This may lay the foundation for a shift in the GBP's outlook from bearish to bullish.

Meanwhile, the RSI has slipped to around 60.00 but has not yet surrendered its bullish range, leaving more room for investors' imagination.

A break of the March 7 high at 1.2063 would push the pair towards the February 21 high at 1.2148, breaking the recent range-bound pattern and returning to the early February high at 1.2276. Breaking the latter would allow the pair to potentially return to the uptrend started at 1.0356.

However, if the GBPUSD short-term correction stalls, the asset may return to or continue Wednesday's downtrend. The next support lies at the low of 1.17633 from November 17 last year.

Overall, as mentioned before, although the current trend is still on the downside, there is ample room for upward movement; however, in view of the release of important data, betting is not recommended, and a strategic layout is more advisable.

Trading Recommendations

Trading Direction: Short

Entry Price: 1.2290

Target Price: 1.1651

Stop Loss: 1.2450

Valid Until: 2022-03-24 23:55:00

Support: 1.1921, 1.1805, 1.1709

Resistance: 1.2063, 1.2150, 1.2221

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Eva Chen

Analyst

Master of Economics, 8 years in the financial industry, CFA holder, joined HSBC (Hong Kong) Bank in 2013 after graduating from the University of California, USA in the Investment Research and Markets Department. With years of financial market experience and trading experience, having provided excellent investment advice to many brokerages, entity derivatives importers and clients in Greater China.

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539

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GBPUSD: Choice Space of Bull/Bear Ratio Returns to Starting Point, It's Not Recommended to Bet But Focusing on Strategic Layout

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