GBPUSD: back to 1.60 we go

Despite the UK Construction PMI missing expectations an hour ago, the GBP bulls have continued to charge forward this morning and have been successful in regards to entering 1.60. The expectations for a Construction PMI around 63.5 were quite high and a PMI score of 61.4 is nothing to be concerned about. After all, the PMI was still way beyond the 50 area which separates growth from contraction, so I think investors are still looking at the UK Construction PMI positively. In reference to why the PMI may have slowed down from the previous months impressive 64.2, recent UK housing data has pointed towards a slowdown and perhaps this is starting to impact construction activity.

This week is heavy with UK PMI releases, but we have not yet seen any further indications of the Bank of England (BoE) being validated with its concerns that UK economic momentum will slow down. On Wednesday, the Services PMI is announced and we can expect further GBP movement. The services sector is not only the main GDP contributor, but also equates to around 80% of the UK labour force. Therefore the release can have quite a big say in whether the GBPUSD attempts a prolonged stay around 1.60, or slips back under 1.60.

Overall, the PMIs from the UK this week have been strong and provided validity towards exactly why the IMF has declared the UK to be the fastest growing economy in the advanced world. Although interest rate expectations have cooled down following the recent BoE minutes release, there is still a great deal to be optimistic about for the UK economy. For example Monday’s Manufacturing PMI being declared at a three-month high will limit fears that reduced demand from Europe will hurt the UK economy and consistently high PMI releases will counter another fear for the BoE – weak inflation.

In regards to this afternoon, where the GBPUSD trades will be dependent on how the markets react to the US Factory Orders release. A monthly 0.4% decline is currently expected, which could slow down the recent Dollar rally. If Factory Orders are confirmed as having declined, the GBPUSD bulls could still have the legs to reach resistance at 1.6037. In the event that the Factory Orders surprises to the upside, 1.5970 could be used as support.

Elsewhere, the Eurodollar has performed in line with expectations today and continued to consolidate around 1.25 on Tuesday morning. Whether the Euro can appreciate any higher will be linked to whether the US Factor Orders release encourages any risk appetite in the currency markets. The European Commission Economic Forecast just moments ago raised a few eyebrows, with the main one being the European Commission seeing inflation lower than the ECB. This might reiterate to investors that the longer term risks to the EURUSD are still to the downside, but USD demand needs to remain strong for this pair to return to the low 1.24’s.

Ahead of the now highly anticipated Wednesday morning speech from Bank of Japan (BoJ) Governor Kuroda, the USDJPY has continued to pull back after such a sudden advance. This pair has pulled back by over 80 pips today, with investors choosing to take profit on a pair that gained 500 pips within just two days. There is perhaps a consensus among investors that Kuroda will say something along the lines of the BoJ acted to help the longer term Japanese economic future, which is perhaps why the JPY is strengthening today. If US Factor Orders are confirmed as having declined in a few hours, potential support for the pair can be found at 113.167.

After finally extending below that critical $1180 support level, Gold has continued to drift below $1170 on Tuesday morning. The move below $1180 will be seen as crucial in the longer term and with the Federal Reserve stepping towards normalizing monetary policy, you must concede that the bears are now in control of the longer term future of Gold. $1180 will now likely act as potential resistance for any swings higher, but the potential for a strong US NFP to conclude the week remains strong. Therefore I am not ruling further potential downside moves to $1153.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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