A Comprehensive Analysis on GBP/USD, EUR/GBP, and GBP/AUD
GBP, UK Construction PMI, and BoE Decision Maker Panel Survey
GBP’s Strong Performance Expected to Continue
Market experts believe that the British pound (GBP) will continue to perform well against other major currencies in the coming days and weeks. They think that the UK faces a bigger challenge in dealing with inflation compared to the US Federal Reserve and the European Central Bank. As of now, market participants are predicting that the Bank of England (BoE) will raise interest rates to a peak of 6.5% by March 2024.
Inflation Picture and BoE Decision Maker Panel Survey
Despite the BoE’s belief that inflation will decrease quickly in the second half of the year, it is becoming harder to disagree with market participants. The BoE Decision Maker Panel Survey released this morning supports the BoE’s belief that inflation is on the decline. Businesses expect output price inflation to decrease over the next year, with the year-ahead output price inflation expected to be 5.3% in the three months to June, down from 5.4% in the three months to May. The one-year ahead CPI inflation expectations also decreased to 5.7% in June, down from 5.9% in May. However, prices currently remain sticky, as firms reported stable annual unit cost growth in June at 9.4%. Until we see concrete data confirming these expectations, my overall opinion on the UK and global inflation picture remains unchanged, with more stickiness expected.
UK Construction PMI Data
This morning, the UK Construction PMI data showed a decline for the first time in five months. The drop was due to a decrease in housing activity, with residential work experiencing its fastest decline in about three years. However, there was a positive aspect to the data as input prices decreased for the first time since January 2010. According to Tim Moore, Economics Director at S&P Global Market Intelligence, the weaker housing market conditions caused by higher borrowing costs had a major impact on UK construction output in June. Despite the slowdown, it is unlikely that the Bank of England (BoE) will pause at the July meeting, which is good news for the continued strength of the GBP.
Price Action and Potential Setups
GBPUSD saw a decent rally this morning after consolidating above support at the 1.2680 level. Looking at the price action, it seems that we could be heading towards new highs, as last night’s slightly hawkish FOMC minutes did not disrupt the upward momentum. On the 2-hour timeframe, a golden cross pattern appeared in the Asian session, indicating a rally that we have seen in the European session. GBP/USD is now only 80 pips away from the year-to-date high, with the psychological level of 1.3000 looking particularly attractive.
The ascending trendline and 50-day moving average (MA) are immediate support areas that keep the uptrend intact. Only a daily candle break and close below the trendline and recent swing low around the 1.2600 level would make me reconsider my current bullish view on cable.
From a technical perspective, GBP/AUD has been quite interesting and a pair that I have been closely monitoring. After a third touch of the ascending trendline, GBP/AUD reached a fresh high around the 1.9240 level on June 28, as I mentioned in my analyst pick. After some consolidation, the pair found support at the psychological level of 1.9000, and a bullish engulfing candle close yesterday suggests further upside potential. Considering the price action and the supportive fundamental backdrop, I still believe that GBP will gain further strength. The Reserve Bank of Australia (RBA) decided to pause rate hikes once again, while the BoE is expected to deliver another rate hike this month, with more already priced in by market participants.
EUR/GBP on the daily chart is heading towards new lows after a retest of the ascending trendline following the breakout on May 31. EURGBP is particularly interesting and is also my top trade idea for the third quarter. Looking at the overall price action, I believe that we could reach the psychological level of 0.8500, which would be a fresh low before a potential retracement towards the 0.8560 resistance area or possibly the 50-day MA, currently at 0.8639.
This would provide potential short opportunities with a better risk-to-reward ratio as the pair moves lower towards the support area at 0.8350. According to IG client sentiment data, 73% of traders currently hold long positions on EUR/GBP. Since we typically take a contrarian view of client sentiment data, we could see a short-term correction before the downtrend resumes.