Surprise! The Pound was the Strongest Major today. Will this Impressive Performance Survive Tomorrow’s UK Employment Numbers?
Eric Furstenberg • 3 min read
Although today’s UK data came out better than expected, this wasn’t the only factor driving the GBP/USD higher. The US Core CPI prints came in below the estimated numbers. The month over month number was 0.1% while the estimated number was 0.2%.
Although the economic data translated into a rise in the GBP/USD exchange rate today, there are definitely some other contributing factors to the sudden bid in the pound. Perhaps the whole Brexit theme has been priced into the exchange rate so effectively by the market already, that the British pound might actually be undervalued at the moment. There are many potential causes to speculate about, but one thing is certain – the pound freefall has been stopped in its tracks, at least for now. Let’s look at a few charts:
GBP/USD Daily Chart
Here you can see how the RSI indicator is returning from oversold which is below 30. The current reading is 32.12. When an instrument returns from an oversold (or overbought) level like on the chart above, it indicates to informed market players that an extension of the retracement might be on the cards. This might be due to profit taking, or new buyers entering the market at the reduced price. Whatever the reason might be, when this indicator gives us this type of signal, we need to be very careful not to fight the retracement move. In this case, initiating new short positions may be the worst thing we could do, as we could easily get caught on the wrong side of the market. The current market price is quite far below the short-term moving average, the 20-EMA. This and the oscillator indicators tell us that the price is still largely oversold. Surely there could arise some great opportunities to sell the pound again, but we would have to see solid renewed selling pressure step in before we pull the short trigger again.
Tomorrow is an important day for the British pound. At 08:30 we have the release of UK employment numbers. The unemployment rate is expected to remain at 4.9% while the Claimant Count is expected to rise by 3000. This measures the change in the number of unemployed individuals in the UK during the previous month. A larger than expected number could hurt the pound, and if we look at the rising trend (of the Claimant Count number) of the last few months, it wouldn’t be a surprise to see a higher number than the forecasted one.
If you like trading volatility and economic news events, this is a great pair to trade tomorrow. At 14:00 GMT the BOC (Bank of Canada) will release their interest rate decision and monetary policy report. Thirty minutes later the US crude oil inventories are released which could also move the Canadian dollar. Then, at 15:15 GMT the Bank of Canada’s governor Mr. Stephen Poloz will deliver his speech which normally accompanies the BOC’s interest rate decision. Perhaps his speech and the monetary policy report may give us some clues to how the Canadian economy is faring at the moment, as well as what to expect from this economy in the near future. The rising oil price is definitely aiding the Canadian economy, and perhaps the pressure on their economy is currently starting to wane. As I am writing this article, the oil price is rising sharply. In the last 5 minutes, it has risen 36 cents! Tomorrow’s BOC meeting should be very interesting indeed. Let’s look at a daily chart of the USD/CAD:
USD/CAD Daily Chart
I don’t like the hammer candlestick that formed today. Nevertheless, it doesn’t change my bearish bias on this pair. If the BOC keep their interest rate unchanged at 0.5% tomorrow, and their economic outlook looks great, the USD/CAD could offer some great short selling opportunities, as we could see a further breakdown in the pair soon.
The Australian dollar also posted a solid performance against the US dollar today. Take a look at this daily chart:
AUD/USD Daily Chart
If the price manages to break out of this ascending wedge to the upside, the pair might rocket much higher from here. The current price is just not the perfect level at which to enter long positions – at the moment the price action is moving sideways, and I would like to see a solid breakout (and subsequent retest) before I’d enter long on this pair.
We’ve covered most of the important news releases for tomorrow. Other events that could have a great effect on the commodity currencies, especially the Australian dollar, are the Chinese GDP and industrial production numbers tomorrow morning at 02:00.
Have a good trading day!