GBPUSD: Even less attraction for the Pound

The Pound just took its third consecutive hit in as many days, when it was announced that the UK Services PMI growth for December had slowed to its slowest rate in 19 months. Bearing in mind the UK Services sector is the largest GDP contributor, this does not bode well for UK economic momentum as 2014 concluded. Not only this but after data over the last 48 hours showed that activity had also slowed down in the Construction and Manufacturing sectors, it provides further evidence of UK economic momentum slowing down. When you combine these economic results, alongside some political uncertainty with the UK General Election now being four months away, it is conceivable to see why the GBPUSD has entered the year by dropping nearly 400 pips.

As mentioned before, there is a lack of investor attraction towards the Pound right now and the weaker Services PMI (55.8) is only going to further weigh on investor sentiment. Despite signs of domestic growth slowing down weighing on sentiment, we also have momentum heating up for the UK General Election this upcoming May. Following the unexpected volatility with the Scottish referendum this past September, it is far more likely that investors are going to want to wait for any uncertainty to clear before entering the currency.

Aside from the above, another reason behind reduced investor attraction for the Pound is that traders are aware that the Bank of England’s (BoE) view on raising interest rates is at a standstill. The BoE’s view on inflation is becoming increasingly dovish and these views are likely to become even stronger before they weaken, with this ultimately pushing back pressure on the BoE to raise UK interest rates. As a result of this, investor attraction is becoming even more muted. Ultimately, there is a combination of different factors that Sterling bears are taking advantage of to send the GBPUSD price down and if the UK inflation levels do continue to weaken, there is potential for this fall to continue.

Overall, the upside potential for the GBPUSD is really limited right now. The highest chances of this pair moving to the upside are reliant upon USD weakness, but with us now approaching the months where we can expect interest rate talk to intensify, it is hard to envisage widespread USD weakness. After all, there is so much pressure on global indices at present as global economic concerns remain in the headlines and as corporations/economies struggle to adapt to the lower oil prices, the US economy is under further pressure to continue leading the global economy. The one bright spot is that UK consumers are benefiting from the lower fuel prices and seeing improved disposable income. This presents an opportunity for improved retail sales data (such as December) to potentially provide sterling bulls with momentum to move higher.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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