Forex Market: GBP/USD trading outlook for October 26th 2016

Yesterday’s trade (in GMT terms) saw GBP/USD within the range of 1.2083-1.2246. The pair closed at 1.2190, edging down 0.40% compared to Mondays close. It has been the 199th drop in the past 367 trading days and also the steepest one since October 14th. The daily low has been a level not seen since the October 7th “flash crash”. The major pair has extended its slump to 6.07% so far during the current month, after losing 1.23% in September.

At 7:28 GMT today GBP/USD was inching down 0.05% on the day to trade at 1.2184. The pair touched a daily high at 1.2189 during the late phase of the Asian trading session and a daily low at 1.2157 during late Asian trade as well.

On Tuesday GBP/USD tumbled to lows unseen in 2 1/2 weeks, but later managed to recoup a portion of its losses during Bank of England Governor Mark Carneys testimony in front of the House of Lords Economic Affairs Committee in London. Carney said he would not factor in political issues, when he decides whether to extend his stay at the Bank beyond his 2018 departure. “It is entirely personal, and no one should read anything into that decision in terms of government policy, actual, imagined, potential, past, etc.,” Carney said, cited by Reuters. “This is a role that requires total attention, devotion, and I intend to give it for as long as I can. But those are the only factors.” The BoE Governor also downplayed Prime Minister Theresa Mays criticism regarding the “bad side-effects”, which low borrowing costs may induce.

In regard to Sterlings depreciation in the past couple of months Carney said it had been “fairly substantial”. The most recent drop in the Pounds value came following PM Mays speech on October 2nd, when she said formal discussions on Brexit would be initiated by the end of March 2017.

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

Fundamentals

United Kingdom

BBA Home Loans

The number of home loans in the United Kingdom, issued by the British Bankers’ Association (BBA), probably increased to 37 300 in September, according to market expectations, from the unrevised 36 997 in August. The BBA features the major banks in the country, which account for almost 60% of overall mortgage lending. The number of mortgage loans is considered as a leading indicator in regard to UK housing market conditions. As growth in mortgage lending signifies a healthy housing sector, which also contributes to overall economic activity, in case the number of loans rose more than projected, this would have a moderate bullish effect on the Sterling. The BBA is to publish the official figure at 8:30 GMT.

United States

Services PMI by Markit – preliminary reading

Activity in the US sector of services probably increased at the same rate in October as the one reported in the prior month, with the corresponding preliminary Purchasing Managers’ Index coming in at a reading of 52.3, according to the median forecast by experts. The latter has been the highest PMI level since April, when a final 52.8 was reported. According to Markit, in September, new work increased at a moderate pace, new business growth slowed, while employment reached its lowest level since March 2013. At the same time, backlogs of work rose for a third straight month in September.

The PMI is based on data collected from a representative panel of more than 400 private sector companies, which encompasses industries such as transport and communication, financial intermediaries, business and personal services, computing & IT and hotels & restaurants. Values above the key level of 50.0 indicate predominant optimism (expansion in general activity). In case a faster than-expected expansion in services sector activity is reported, this would have a moderate bullish effect on the US dollar, as services contribute to a considerable portion of the US GDP. The preliminary reading by Markit Economics is due out at 13:45 GMT.

New Home Sales

Sales of new single-family homes probably decreased 1.0% to the seasonally adjusted annual rate of 600 000 in September, according to market expectations, from 609 000 reported in the preceding month.

In August, sales in the Northeast region fell the most (-34.3% to 23 000), followed by those in the South (-12.3% to 343 000) and those in the Midwest (-2.4% to 81 000). On the other hand, new home sales in the West area went up 8% to 162 000 during the same period.

The median sales price of new houses sold went down as low as USD 284 000 in August, after being at USD 293 100 in the preceding month. However, the average sales price rose to USD 353 600 in August from USD 352 000 in July. At the end of the month, the seasonally adjusted estimate of new houses for sale was 235 000, up 1.7% from a month ago. It represents a supply of 4.6 months at the current sales rate, according to the report by the US Census Bureau.

In case the index decreased more than anticipated, this would have a strong bearish effect on the US Dollar. The Census Bureau is to release the official figure at 14:00 GMT.

Bond Yield Spread

The yield on UK 2-year government bonds went up as high as 0.273% on October 25th, or the highest level since October 17th (0.288%), after which it closed at 0.272% to add 3 basis points (0.03 percentage point) compared to October 24th.

Meanwhile, the yield on US 2-year government bonds climbed as high as 0.860% on October 25th, or the highest level since October 14th (0.863%), after which it fell to 0.857% at the close to add 1.3 basis points (0.013 percentage point) compared to October 24th.

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, narrowed to 0.585% on October 25th from 0.602% on October 24th. The October 25th yield spread has been the lowest one since October 21st, when the difference was 0.580%.

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 – 1.2205
R2 – 1.2220
R3 (Range Resistance – Sell) – 1.2235
R4 (Long Breakout) – 1.2280
R5 (Breakout Target 1) – 1.2332
R6 (Breakout Target 2) – 1.2354

S1 – 1.2175
S2 – 1.2160
S3 (Range Support – Buy) – 1.2145
S4 (Short Breakout) – 1.2100
S5 (Breakout Target 1) – 1.2048
S6 (Breakout Target 2) – 1.2026

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