Forex Market: GBP/USD daily trading outlook

Yesterday’s trade saw GBP/USD within the range of 1.3000-1.3291. The pair closed at 1.3020, plummeting 2.03% compared to Mondays close. It has been the 156th drop in the past 287 trading days and also the sharpest one since June 27th. The daily low has been the lowest level since July 1985. The cross has fallen 3.04% so far during the current month, after depreciating 7.94% in June.

At 6:47 GMT today GBP/USD was losing 0.75% on the day to trade at 1.2922. The pair touched a daily high at 1.3028 during the early phase of the Asian trading session and a daily low at 1.2797 during the mid phase of Asian trade. The latter has been a fresh 31-year low.

On Wednesday GBP/USD trading may be influenced by the following macroeconomic reports and other events as listed below.

Fundamentals

United States

Balance of Trade

The deficit on US balance of trade probably widened to USD 40.00 billion in May, according to market expectations, from a deficit figure of USD 37.40 billion in April. The latter reflected a surge by USD 1.4 billion in the goods deficit to USD 58.8 billion and a drop by USD 0.5 billion in the services surplus to USD 21.4 billion.

Total exports expanded at a monthly rate of 1.2% in April to reach USD 182.796 billion. Exports of goods rose USD 2.8 billion to reach USD 120.1 billion during the period, while exports of services shrank USD 0.3 billion to reach USD 62.7 billion.

Total imports, at the same time, rose at a monthly rate of 2.1% to reach USD 220.2 billion in April, or their highest level since February. Imports of goods were USD 4.3 billion higher to reach USD 178.9 billion during the period, while imports of services went up USD 0.3 billion to USD 41.4 billion.

Year-to-date, the total trade deficit narrowed 4.8% (USD 8.1 billion) compared to the same period a year ago.

In case the trade balance deficit widened more than anticipated in May, this would mount selling pressure on the US Dollar, because of negative implications regarding US economic growth. The Bureau of Economic Analysis will release the official trade data at 12:30 GMT.

Non-Manufacturing PMI by the ISM

Activity in United States’ sector of services probably increased at a faster pace in June from a month ago, with the corresponding non-manufacturing PMI coming in at a reading of 53.3, according to the median forecast by experts, up from a level of 52.9 in May. The latter has been the lowest PMI reading since February 2014, when the gauge was reported at 51.6. If expectations were met, June would be the 78th consecutive month, when the gauge stood in the area above 50.0. The PMI is a compound index, based on the values of four equally-weighted components, which comprise it. These sub-indexes reflect seasonally adjusted new orders, seasonally adjusted employment, seasonally adjusted business activity and supplier deliveries.

The New Orders Index stood at 54.2 in May, down from a reading of 59.9 in the prior month. The Employment Index fell to 49.7 in May from 53.0 in April, while indicating a drop after two consecutive periods of growth, according to data by the Institute for Supply Management (ISM). The Prices Index climbed to 55.6 in May from 53.4 in April, which indicated prices went up for a second consecutive month. The Non-Manufacturing Business Activity Index decreased to 55.1 in May from a reading of 58.8 in April, indicating growth for an 82nd straight month.

Among the 18 services industries, 14 reported growth and 4 reported contraction in activity in May.

Readings above the key level of 50.0 are indicative of optimism (expansion in activity). In case the index accelerated at a faster rate than anticipated in June, this would provide a strong support to the US dollar. The Institute for Supply Management (ISM) is to release the official PMI reading at 14:00 GMT.

FOMC Minutes

At 18:00 GMT the Federal Open Market Committee (FOMC) will release the minutes from its meeting on policy held on June 14th-15th. The minutes offer detailed insights on FOMC’s monetary policy stance. This release will be closely examined by market players, as it may provide clues over how the Feds policy tightening cycle will develop in the future. High volatility of the currency pairs containing the US dollar is usually present after the publication.

Last month the Federal Open Market Committee left the target range for the federal funds rate intact between 0.25% and 0.50%, as largely expected. In her testimony before the Committee on Banking, Housing, and Urban Affairs on June 21st, Fed Chair, Janet Yellen, said that given employment growth slowdown in May and economic outlook uncertainty, a cautious approach to policy remained appropriate.

”The Committees actions reflect a careful assessment of the appropriate setting for monetary policy, taking into account continuing below-target inflation and the mixed readings on the labor market and economic growth seen this year. Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2 percent objective”, Yellen noted.

Markets will be also paying attention to the statements by several Fed officials. At 12:00 GMT the Fed President for New York and also a FOMC member, William Dudley, is to speak, followed by FOMC member, Daniel Tarullo, at 14:00 GMT.

Bond Yield Spread

The yield on UK 2-year government bonds went as high as 0.181% on July 5th, after which it closed at 0.122% to lose 2.6 basis points (0.026 percentage point) compared to July 4th.

Meanwhile, the yield on US 2-year government bonds climbed as high as 0.593% on July 5th, after which it fell to 0.554% at the close to lose 3.5 basis points (0.035 percentage point) compared to July 4th.

The spread between 2-year UK and 2-year US bond yields, which reflects the flow of funds in a short term, narrowed to 0.432% on July 5th from 0.441% on July 4th. The July 5th yield spread has been the lowest one since July 1st, when the difference was 0.417%.