GBP/USD forms triple top as UK economy makes modest recovery

GBP/USD forms triple top as UK economy makes modest recovery
Written by:
Crispus Nyaga
14th July, 06:52
  • The GBP/USD pair declined slightly after mixed economic data from the UK.
  • The data showed that the economy rose by 1.8% in May after falling by 20.4% in the previous month.
  • The pair will next react to US and UK inflation data that will be released today and tomorrow.
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The GBP/USD pair turned lower today as traders reacted to mixed economic data from the UK. The pair is trading at 1.2550, which is lower than yesterday’s high of 1.2670.

GBP/USD
GBP/USD ticks lower after GDP data

UK economy improved in May

The UK economy made some improvements in May as the government relaxed some of its travel and business restrictions.

According to the Office of National Statistics (ONS), the economy expanded by 1.8% in May after contracting by a whopping 20.4% in April. This figure was higher than the contraction of 5.5% that analysts polled by Reuters were expecting.

Most sections of the economy made a modest improvement in May. The index of services rose by 0.9% after falling by 18.9% in April while the index of production rose by 6.0% after falling by 20.2% in the previous month.

Similarly, the manufacturing sector expanded by 8.4% after declining by 24.4% while the construction output rose by 8.2%. The only laggard in May was the agricultural sector, which fell by 6.2%. All these numbers were higher than what analysts were expecting. Earlier this month, data showed that the construction PMI rose sharply in June.

The service sector declined by 18.9% in the three months to May this year. This was expected because many companies in the sector were viewed as being non-essential. For example, many restaurants and hotels were not doing any business until two weeks ago when the government eased these restrictions. Recent data from Markit showed that the services PMI jumped sharply in June.

With schools being closed, the education sector declined by 37% while food and beverage services fell by 69.3%. Wholesale and retail trade sector declined by 71%.

Meanwhile, production declined by 15% in these three months. Manufacturing declined by 18% while mining and quarrying fell by 10.7%. All this led the economy to decline by 19.1% in the three months to May.

The report came three days after Moody’s warned that the UK economy will contract by 10.1% this year. The analysts said:

“We forecast a contraction of 10.1% in the UK’s GDP for this year, but expect a gradual subsequent recovery on the back of the easing in lockdown measures, with growth rebounding to 7.1% next year.”

GBP/USD awaits inflation data

The GBP/USD will next react to inflation data from the United States that will come out at 12:30 GMT. The data is expected to show some improvement as the economy reopened in June. Analysts polled by Reuters see the headline consumer price index rising to 0.6% in June from the previous 0.1%. On a MoM basis, they see the CPI jumping to 0.5% from -0.1%.

The core CPI, which excludes the volatile food and energy products, is expected to decline from the previous 1.2% to 1.1%.

While these numbers are expected to show progress, the biggest challenge is the rising number of coronavirus cases in the US. Data released yesterday showed that the country confirmed more than 57,000 new cases. As a result, states like California, New Mexico, and Oregon, have added new restrictions on movements.

The GBP/USD will also focus on inflation data from the UK that will come out tomorrow. Analysts see the headline CPI falling from the previous 0.5% to 0.4% whule core CPI remaining unchanged at 1.2%. On a MoM basis, they expect the headline CPI to drop to 0.2% and the core CPI to drop to 0.1%.

GBP/USD technical forecast

GBP/USD

The GBP/USD pair is trading at 1.2541, which is below the past two day’s top at 1.2665. On the daily chart, this price is a few pips below the 61.8% Fibonacci retracement level. The price is slightly above the 50-day and 100-day EMAs. Therefore, since the pair has made a triple top pattern, I expect the price to continue falling as bulls target the next support at 1.2500. This price is at the convergence of the two EMAs and the 50% Fibonacci retracement.

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