- Summary:
- GBPUSD dropped like a rock in Friday's trading despite the UK services PMI printing above 50.0 for the first time in 5 months. Why?
GBPUSD was the biggest loser among the majors on Friday. The currency pair retreated from its two-week highs at 1.3173 despite the PMI reports from the UK coming in better than expected in January. GBPUSD then steadily traded lower, closing the day at 1.3075 with a 40-pip loss.
The manufacturing PMI for January came in at 49.8 and topped the forecast at 48.8. Meanwhile, the services PMI printed at 52.9, higher than the 51.1 forecast. According to Markit, the numbers for this month suggest that economic activity in the private sector is picking up after the UK general elections. The services sector is particularly promising because this is the first time in five months that it printed higher than the 50.0 baseline reading which indicates expansion.
So why did GBPUSD fall on Friday? Aside from the coronavirus weighing down market sentiment, profit-taking may have ensued. The currency pair rose 212 pips last week from where it bottomed at 1.2961. Most of the bullish rally can be attributed to the positive data we saw from the UK which eased speculations of a rate cut from the BOE this week. However, with the much awaiting central bank decision due on Thursday, market participants may have decided to reduce their risk ahead of the event. Consequently, this dampened demand for the pound.
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GBPUSD Outlook
On the 4-hour chart, we can see that GBPUSD has pared most of its gains back to the 50% Fib level (drawing from the low of January 20 to the high of January 24). Reversal candles around this price, 1.3060, could mean that GBPUSD may soon rally to its recent highs around 1.3150. However, it is worth noting that the currency pair has room to move lower and still maintain its uptrend. By connecting the lows of December 24, January 13, January 14, and January 20, we can see that there is trend line support around 1.3000. GBPUSD could bounce off at this level. However, a strong bearish close below the trend line could mean that it may still drop to its December lows at 1.2920.