GBPUSD Bullish Pennant Remains as UK Records Sharp Contraction

Summary:

The GBPUSD pair forme a bullish pennant as investors reacted to the sharp contraction of the UK economy because of the coronavirus pandemic

The GBPUSD pair is little changed today as investors react to the better-than-expected economic data from the UK. The pair is trading at 1.3042, which is slightly higher than the intraday low of 1.3016.

According to the Office of National Statistics (ONS), the UK economy plunged by a record 20.4% in the second quarter as the country continued to deal with the coronavirus pandemic. This is the biggest contraction of the UK economy ever recorded. Nonetheless, it was better than the decline of 20.5% that analysts were expecting. It was also better than the US contraction of 32.9%.

The contraction of the UK economy was mostly because of a 31.4% decline in business investment and a sharp decline in consumer spending. Another data showed that industrial production declined by 12.5% year on year in June. This was better than the decline of 12.8% that analysts were expecting. It rose by 9.3% on a month on month basis.

Manufacturing production rose by 11.0% on a MoM basis but fell by 14.6% on a YoY basis. This decline was better than the 15% that analysts were expecting. The GBPUSD pair also reacted to the construction output data. The bureau said that construction output declined by 24.8% in June. The trade deficit widened to £5.12 billion.

These numbers came a day after we received mixed employment numbers from the UK. The numbers showed that the unemployment rate remained unchanged at 3.9% in June. This stable number was mostly because of a government’s furlough program that has seen it pay salaries for about 80% of the employees.

GBPUSD outlook

The GBPUSD response to the GDP numbers was muted. The pair is trading at 1.3046, which is slightly below last month’s high of 1.3185. The daily chart shows that the price has found strong resistance at the current level, which is also close to the March 9 high. Also, the price is above the 100-day and 50-day exponential moving averages. It also seems to be forming a bullish pennant pattern that is shown in pink. Therefore, I suspect that the price will break out higher after the current consolidation.

However, a decline below the 78.2% Fibonacci retracement level of 1.3063 will invalidate this trend. It will send the message that bears have prevailed, which will see the price continue falling.