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British Pound Climb Continues Despite Brexit Anxiety Driving GDP Growth to Lowest in Years

Currencies / British Pound Jun 01, 2016 - 12:16 PM GMT

By: AnyOption

Currencies While the Pound has recently shrugged off a further tapering in the economy, Brexit fears continue to define the economic climate as evidenced by decelerating household spending and falling business investment.  As the vote draws nearer, the economic data is likely to show that the anxiety is becoming more acute, with an even deeper pullback in fundamental activity anticipated.  Current forecasts are showing growth retreating even further to a 0.30% pace for the second quarter, a figure that could easily be lower based on the sluggish attitude of consumers and businesses as they await the outcome.  In the meantime, the Pound continues to be sensitive to the polling, with expectations of a “Bremain” vote driving the Pound higher, despite the obvious risks to the outlook that could sharply reverse the existing momentum.

Fundamental Deceleration

According to the latest revisions to growth figures, first quarter GDP in the UK measured 0.40% while the annualized figure was adjusted lower to 2.00%, the lowest rate reported in over three years as businesses postpone investments and consumers cautiously tighten the purse strings in anticipation of the upcoming EU Referendum Vote.  Although there have been countless polls and surveys, the vote is expected to be a photo finish despite stern warnings from the Conservative Party extolling the virtues of remaining a member of the European Union.  While the actual financial and political impact of a decision to exit is still unknown, the scaremongering continues to hit new heights after a poll of economists showed that nine out of ten surveyed believe that a decision to leave will have negative implications for the nation. 

While the Central Bank has refrained from joining in the debate about the merits of staying or leaving, Bank of England Governor Mark Carney has underscored that there are risks associated with the vote, namely to how the currency behaves and how the decision will influence trade.  However, near-term, the real issue however is not the outcome of the vote, but how it is impacting decision-making in the interim.  As a result of reduced economic momentum, unemployment has been stuck at 5.10% for the last five readings, halting the tremendous progress witnessed over the last few years.  Some have attributed the stickiness to an unwillingness to add to payrolls ahead of a decision that could negatively impact local businesses.  Additionally, inflation has ticked lower, with annualized headline consumer prices sliding to 0.30% in April from the 0.50% reading in March.

Economic activity has seen a sharp pullback as a result of the uncertainty. Although the UK Pound has recently gained strength after bouncing back from multi-year lows that were reached due to exit concerns, there still remains potential for another round of losses in the currency.  The last few polls have seen increasingly volatile reactions from the Pound, sparking the notion that the lead up to the event will be an unstable period for the GBPUSD pair.  Additionally, adding to the unpredictability of the pair is the US Federal Reserve which is set to meet in the middle of the month to determine if a rate hike is appropriate.  Although upgraded GDP might provide tailwinds for a more hawkish Fed, the key determinant for any movement on rates will be the upcoming nonfarm payroll figure on Friday.  A number that exceeds consensus estimates of 158,000 could fuel a further rally in the dollar.

Technically Speaking

Looking closely at the price action of the last few months, the GBPUSD appears to be consolidating in an ascending triangle breakout formation.  Formed by the combination of resistance sitting firmly at 1.4675 and an uptrend line beginning from the February lows, the triangle formation has a bullish bias.  Any candlestick close above resistance on the upside that is accompanied by heightened trading volume and momentum should be considered an upside breakout.  However, capping upside in the pair is the 200-day moving average which is currently trending lower above the price action, acting as resistance.  While the 50-day moving average is trending higher and acting as support for GBPUSD, a move below the uptrend line could signal a breakdown in the pattern and potential downside reversal in the currency pair.

Looking Ahead

The main drivers of GBPUSD price momentum over the coming sessions include manufacturing data due from both the UK and US before BoE Governor Carney speaks on Thursday, followed by the US nonfarm employment figures and unemployment rate on Friday.  However, in the background are the looming decision from the US Central Bank and the run up to the EU Referendum vote.  Any indication that there is a leaning towards “Brexit” will undoubtedly shake the Pound to its core, weighing on the GBPUSD pair despite current price action that suggests more bullishness in the pair going forward.

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