Analysis | October 13, 2020

KTM FX Weekly: Encouraging economic data is supporting GBP

The pound has been showing a compact strength across the board for a month. Finally, we are in the crucial week ahead of the E.U. summit. 

Overnight the pound extended some gains, up 0.50% against the EUR and 0.25% against the dollar on the latest Virus news. On Monday, Johnson announced a full list of alert levels in English regions. He announced that there are now three local DOVID alert levels labeling them as being on medium, high, or very high alert, depending on the extent of spread of the virus, and requiring them to follow different rules.

Read the full guidance here: https://www.gov.uk/guidance/local-covid-alert-levels-what-you-need-to-know.

The focal point this week will be the European Council Summit on 15-16 October. We look for Brexit headlines but don’t expect an outcome and have to wait until the last minute. However, this week E.U. summit talks will be the key driver to the pound.

We exercise a wait-and-see approached as short-term F.X. performance factors outweigh the E.U. summit for the pound. E.U. summit is just under two days’ time on 15-16 October; the pound is not displaying any great nervousness around this potential uncertain risk event.

The EURGBP rate has to remain stoutly its 0.9000-0.9200 trading range over recent weeks, with external influences dominating day-to-day movements. The recent bounce into the 0.9160 last week was largely prompted by optimism around the UK-EU trade deal.

Data review: Last week’s U.K. economic data is supporting the U.K. recovery story. However, the National Institute of Economic and Social Research (NIESR) expects growth to stop in September and project 0.0 percent. Taking account of the latest ONS estimate for August and our September forecast, NIESR expects to see the growth of around 15 percent in the third quarter of 2020.

The latest UK PMIs showed the service PMI signaled that expansion of the service sector remains marked in September, according to IHS Markit.

  • The U.K. service sector continued its recent recovery from the sharp downturn related to the start of the coronavirus disease 2019 (COVID-19) pandemic earlier in 2020, with business activity rising for a third successive month. Services PMI fell from August’s 58.8, which was the strongest reading since April 2015, to a level of 56.1 in September. Although the lowest reading since June, the index nonetheless pointed to a marked rate of growth.

  • UK GDP grew by 2.1% in August 2020, the fourth consecutive monthly increase, but it remains 9.2% below the February 2020 level. However, this is the fourth consecutive monthly increase following a record fall of 19.5% in April 2020. Industrial Production grew by 0.3% in August 2020, with manufacturing growing by 0.7%.

 

Dr. Kemar Whyte, Senior Economist – Macroeconomic Modelling and Forecasting, said, “These numbers would suggest that the U.K. could grow by about 15 percent in the third quarter of 2020. However, there is further cause for concern ahead with the likely re-imposition of lockdown measures, the winding down of government support measures, and Brexit uncertainty. We expect the economy at the end of this year to be some 8.5 percent below its level at the end of 2019.”

Looking ahead, it will be a quiet week in terms of economic data. We will see the U.K. unemployment rate today.

Moody’s Analytics said, “The U.K. unemployment rate was likely unchanged at 4.1% in the three months to August after rising to 4.1% in July from 3.9% in June”.  

 TECHNICAL OVERVIEW

Technically nothing has changed since last week. The lower lows and lower highs pattern on the four-hour chart are still intact. Watch out for resistance at 0.9175 and 0.9220 if the price is moving higher. Flipside, 0.9000, is pivotal. Below here, support exists at 0.8960 and .08860. Our models like GBP against CHF and USD.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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