Levels to keep an eye on for continued dollar weakness

Pound Sterling (GBP) Analysis

  • UK PMI in focus as stagflation risks threaten to weigh on the pound
  • GBP / USD Key Technical Levels Analyzed
  • Extreme institutional positioning contrary to the mood of the IG customer

Risk incidents in the coming week

Tomorrow, UK PMI data will shed some light on the state of the UK economy as stagflation concerns continue. On Wednesday we have FOMC minutes of meetings that have been known to cause increased short-term volatility. On Thursday, we have the second estimate for Q1 GDP, which is unlikely to cause any major moves, provided we see a figure similar to the flash data. So finally, on Friday we have US PCE inflation data which is expected to provide another month in a row with lower data.

Cable (GBP / USD) Price Outlook: Levels to Watch for Continued Dollar Weakness

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UK PMI data in focus

Following the monthly growth decline in March, traders and investors will closely monitor supplementary data transcripts that provide an indication of future economic activity.

All PMI data except the euro area took a negative turn in recent respective printouts, but remain above the 50 limit. Tomorrow we have UK manufacturing and service PMI data, both of which are expected to continue the lower trend. The fundamental picture for Britain certainly faces many challenges, mainly: stagflation concerns and the protracted problems surrounding the Northern Ireland Protocol, which regulates goods entering Northern Ireland and possibly the rest of the EU from Britain.

Comparative PMI Data (Select Larger Economies)

Cable (GBP / USD) Price Outlook: Levels to Watch for Continued Dollar Weakness

Source: TradingView, prepared by Richard Snow

GBP / USD Key Technical Analysis

Sterling has taken advantage of the softer US dollar and made progress after printing its annual low of 1.2265 ten days ago. Last week, US retail giants Walmart and Target reaffirmed the sharp turnaround in consumption and consumption levels as consumers tightened their belts in response to rising prices, searching for cheaper alternatives where possible.

Level 1.2675 – 1.2700 off resistance poses the next challenge to a bullish continuation while support comes in at 1.2400 followed by 1.2250. That RSI has come out strongly from oversold conditions and is currently testing the center line of the indicator. But the average true range, a measure of volatilityremains elevated – opens the door to two-way price action.

GBP / USD daily chart

Cable (GBP / USD) Price Outlook: Levels to Watch for Continued Dollar Weakness

Source: TradingView, prepared by Richard Snow

Contrasting institutional and client feeling

Large speculators and hedge funds have remained significantly net-short (light blue line), but appear to have flattened out recently. The softer US dollar amid rising recession risks may necessitate a more balanced positioning in the coming weeks if the dollar falls further. Such an adjustment would take place via a reduction in shorts, increase in longs or both – which would be positive for a long GBP / USD bias.

Cable (GBP / USD) Price Outlook: Levels to Watch for Continued Dollar Weakness

The IG client feeling remains long

Cable (GBP / USD) Price Outlook: Levels to Watch for Continued Dollar Weakness

GBP / USD: It shows data from retailers 72.91% of traders are net long with the ratio of dealers long to short of 2.69 to 1.

We typically take one conflicting attitude to audience feelingand the fact that traders are net-long suggests that GBP / USD prices may continue to fall.

The number of traders net-long is 0.33% higher than yesterday and 16.88% lower from last week, while the number of traders net-short is unchanged from yesterday and 27.41% higher than last week.

Positioning is more net-long than yesterday, but less net-long from last week. The combination of the current mood and recent changes suggests a ‘mixed’ GBP / USD trading bias.

— Written by Richard Snow for Technewscity

Contact and follow Richard on Twitter: @RichardSnowFX