Looking to Sell the GBP/USD Retrace as UK Sectors Fall in Contraction

GBP/USD has been quite bearish since July, losing more than 10 cents in the process as it reversed from above 1.30 more than two months ago and approached 1.20 earlier this week, after the increase in US JOLTS job openings report. The US Dollar’s strong bullish momentum has pushed it to a 10-month peak, primarily influenced by the Federal Reserve’s (Fed) hawkish inclination, which serves as a significant drag on the GBP/USD dynamics. The overarching sentiment among investors is that the US central monetary authority will persistently constrict fiscal measures, maintaining elevated interest rates for an extended period.

The Bank of England on the other hand seems to have stopped rate hikes, as the UK economy heads toward a possible recession, with many sectors already there. The BoE’s surprising decision to preserve the status quo last month contributed to the pressure on the British Pound (GBP) and stifled any rebound in GBP/USD .

Moving averages have done a great job in keeping this pair bearish, acting as resistance during retraces higher and pushing the highs lower. The 50 SMA (yellow) in particular has been rejecting the price here a couple of times recently, but we saw a return to it pretty quickly yesterday after the last rejection.

The USD was in a retreat mode as treasury yields were declining, so GBP/USD was making a break above its 200-hour moving average at 1.2155 where the 50 SMA stood. The price tried to extend above that level and last week as well, but each of those brakes failed fairly quickly. But buyers managed to push the price above that moving average. The construction PMI fell to 45 points yesterday, showing that contraction activity contracted, s another sector diving in the UK. As a result, we remain bearish on this pair and sold the retrace higher yesterday in this pair.

UK September Construction PMI

The downturn in September is led by a slump in house building as output also saw its steepest decline since May 2020. Adding to that, new orders also suffered its fastest pace of decline in over three years. S&P Global notes that:

“Output levels declined across the UK construction sector for the first time in three months during September and the latest downturn marked the worst overall performance since the early stages of the pandemic.

“A rapid decline in house building activity acted as a major drag on workloads, with construction companies widely commenting on cutbacks to new residential development projects in the wake of sluggish demand and rising borrowing costs. Concerns about the domestic economic outlook also dampened client spending during September, which contributed to the fastest reduction in commercial building since January 2021.

“The survey’s forward-looking measures once again remained relatively downbeat as order books decreased at an accelerated pace and business activity expectations eased to the lowest so far this year. Moreover, fewer project starts meant that sub-contractor availability increased to the greatest extent since the summer of 2009.

“Lower demand across the supply chain contributed to a robust improvement in delivery times for construction productions and materials, alongside a stabilisation in purchasing costs during September.”