Forex Market: GBP/USD trading outlook for October 24th 2016

Friday’s trade (in GMT terms) saw GBP/USD within the range of 1.2171-1.2263. The pair closed at 1.2231, edging down 0.19% compared to Thursdays close. It has been the 198th drop in the past 365 trading days and also a third consecutive one. The daily low has been a level not seen since October 17th, when a low of 1.2136 was registered. In weekly terms, GBP/USD added 0.36% to its value during the past week. It has been the 20th gain in the past 42 weeks. The major pair has increased its slump to 5.76% so far during the current month, after losing 1.23% in September.

At 7:26 GMT today GBP/USD was inching up 0.02% on the day to trade at 1.2233. The pair touched a daily high at 1.2236 during the early phase of the European trading session, undershooting the daily R1 level, and a daily low at 1.2186 during early Asian trade.

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

Fundamentals

United Kingdom

CBI Industrial Orders

At 10:00 GMT the Confederation of British Industry (CBI) is to release the October results from its survey, encompassing 17 industries. The gauge of industrial orders in the United Kingdom probably improved to a reading of -4 during the three months to October, according to market expectations, from -5 in the previous two periods.

This indicator reflects the net balance between companies, which registered an increase in industrial orders during the respective period of three months and those, which registered a drop. It is the oldest indicator, released from the UK private sector, to show the development tendency in the country’s industrial sector. The Industrial Trends Survey by the Confederation of British Industry provides expert qualitative opinion from senior manufacturing executives, on past and expected trends in output, exports, prices, costs, investment intentions, business confidence and capacity utilization. A level above zero suggests that volume of orders is projected to increase, while a level below zero indicates that expectations point to lower volumes. If the survey showed an improvement during the respective period, this would have a limited bullish effect on the Sterling.

United States

Manufacturing PMI by Markit – flash reading

Activity in US manufacturing sector probably rose at a slightly higher rate in October from a month ago. The corresponding preliminary Manufacturing PMI probably accelerated to a reading of 51.6 in the current month, according to the median forecast by analysts, from a final 51.5 in September. The latter has been the lowest reading since June.

According to the final report by Markit, released on October 3rd: ”Slower rates of output and new order growth were the main factors weighing on the headline index, which more than offset a stronger contribution from the staff hiring component.”

”September data highlighted that production growth eased to a three-month low, driven by a weaker upturn in new work and greater efforts to streamline stocks of finished goods. The latest increase in new business volumes was the slowest seen so far in 2016. Some survey respondents commented on delays to decision making among clients ahead of the presidential election.”

”Softer new business growth resulted in more cautious inventory policies across the manufacturing sector. Stocks of finished goods decreased for the fourth month running and at the fastest pace since late-2015. Pre-production inventories also fell in September, but the rate of decline was only marginal”, Markit stated.

Values above the key level of 50.0 indicate predominant optimism (expanding activity). In case the flash PMI for October came in line with expectations or accelerated even further, this would cause a moderate bullish impact on the US dollar. The preliminary reading is due out at 13:45 GMT.

Fed speakers

At 13:00 GMT the Fed President for New York, William Dudley, is expected to give opening remarks at the second annual conference on the Evolving Structure of the U.S. Treasury Market, which will be hosted by the Federal Reserve Bank of New York.

At 13:05 GMT the Fed President for St. Louis, James Bullard, is to give presentation to Association for University Business and Economic Research in Fayetteville, Arkansas.

At 17:30 GMT the Fed President for Chicago, Charles Evans, is to speak at the Civic Affairs Society of the University Club of Chicago Luncheon in Chicago.

At 18:00 GMT Federal Reserve Board Governor, Jerome Powell, is expected to attend a panel discussion about the future of the settlement process for Treasury market transactions at the second annual conference on the Evolving Structure of the US Treasury Market.

Correlation with other Majors

Taking into account the business week ended on October 21st and the daily closing levels of the major currency pairs, we come to the following conclusions in regard to the strength of relationship:

GBP/USD to NZD/USD (0.8562, or very strong)
GBP/USD to AUD/USD (0.6583, or strong)
GBP/USD to EUR/USD (0.0206, or very weak)
GBP/USD to USD/CHF (-0.0745, or very weak)
GBP/USD to USD/CAD (-0.2754, or weak)
GBP/USD to USD/JPY (-0.3785, or moderate)

1. During the examined period GBP/USD moved strongly in one and the same direction with AUD/USD.

2. GBP/USD moved almost equally in one and the same direction with NZD/USD during the past week.

3. The correlation between GBP/USD and USD/CAD was insignificant.

4. GBP/USD moved almost independently compared to EUR/USD and USD/CHF during the period in question. The correlation between GBP/USD and EUR/USD was almost non-existent.

Bond Yield Spread

The yield on UK 2-year government bonds went up as high as 0.268% on October 21st, or matching the high from a day ago and also being the highest level since October 17th (0.288%), after which it closed at 0.248% to add 3.5 basis points (0.035 percentage point) compared to October 20th.

Meanwhile, the yield on US 2-year government bonds climbed as high as 0.840% on October 21st, or the highest level since October 17th (0.847%), after which it fell to 0.828% at the close to add 0.005 percentage point compared to October 20th.

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, narrowed to 0.580% on October 21st from 0.610% on October 20th. The October 21st yield spread has been the lowest one since August 18th, when the difference was 0.568%.

Daily, Weekly and Monthly Pivot Levels

By employing the Camarilla calculation method, the daily levels of importance for GBP/USD are presented as follows:

R1 – 1.2239
R2 – 1.2248
R3 (Range Resistance – Sell) – 1.2256
R4 (Long Breakout) – 1.2282
R5 (Breakout Target 1) – 1.2311
R6 (Breakout Target 2) – 1.2323

S1 – 1.2223
S2 – 1.2214
S3 (Range Support – Buy) – 1.2206
S4 (Short Breakout) – 1.2180
S5 (Breakout Target 1) – 1.2151
S6 (Breakout Target 2) – 1.2139

By using the traditional method of calculation, the weekly levels of importance for GBP/USD are presented as follows:

Central Pivot Point – 1.2233
R1 – 1.2331
R2 – 1.2430
R3 – 1.2528
R4 – 1.2625

S1 – 1.2134
S2 – 1.2036
S3 – 1.1937
S4 – 1.1837

In monthly terms, for GBP/USD we have the following pivots:

Central Pivot Point – 1.3113
R1 – 1.3312
R2 – 1.3645
R3 – 1.3844
R4 – 1.4042

S1 – 1.2780
S2 – 1.2581
S3 – 1.2248
S4 – 1.1914