USD begins the week higher; GBPUSD breaks trendline

Summary:

• USD enjoying solid start to the week

• GBPUSD back sub 1.30

• Chicago Fed activity index: 0.17 vs 0.22 exp

The US dollar has traded in a fairly narrow range for the past few weeks with a trade weighted index not moving more than 1.5% or 140 pips from low to high. Last week saw a green close and the market hold above the 95 handle once more, but price remains shy of the recent ceiling of 95.83. The last 3 weekly candles show wicks both above and below, which suggests that bulls and bears are fairly evenly matched with pushes higher or lower fading back.  

Even though the USD index has got off to a bright start this week the market remains in the narrow seen of late range from 94.50-96.85. Longer term the market is around the middle of its range seen over the past two years from 88.20-103.85. Source: xStation

It’s a light day on the economic calendar with little due out of note. The Chicago Fed national activity index is arguably the biggest event, and there’s been a bit of a miss in the headline here with a reading of 0.17 lower than the 0.22 expected. However, this doesn’t appear so bad when you consider that the prior month has been revised higher to 0.27 from 0.18. Looking back over the past decade, this indicator remains at a relatively high level even if it has pulled back from its peak seen earlier this year.

The Chicago Fed index on a 3-month basis remains at a relatively high level compared to previous years, even if it has pulled back from recent highs. Source: XTB Macrobond

One of the reasons for the fairly narrow overall range in the US dollar is that there hasn’t been too much by the way of surprises as far as the US is concerned in recent months. The Fed have continued along their path of gradual rate hikes and employment and inflation data have been fairly consistent on the whole. Therefore, several USD pairs are being driven more from the other side of the cross and this week in particular could be a key one for the GBPUSD. This market experienced a prolonged slump from its mid-April high and even though it has recovered in recent months it could be coming back under pressure.

The reason for the latest selling is fairly clear, with the pound coming under pressure due to the latest Brexit developments. It now seems like there is a fair chance that PM Theresa May will face a leadership challenge in the coming days and this may pave the way fro fromer Brexit secretary David Davis to become PM. Given that Davis is seen as more hard line in his approach to Brexit than May, should this occur then the chances of a hard Brexit would rise markedly which could heap pressure back on the pound once more.

From a technical perspective a rising trendline from the August low of 1.2665 has been broken and this opens up the possibility of a retest of this level. Near term support may lie around 1.2920. The rise in recent months now appears to be a counter trend move and in breaking below here the downtrend could be set to resume. The post-referendum low of 1.20 may be over 900 pips away but it is even possible that price gets back down there, or even lower, should Brexit negotiations yield a market-negative outcome.  

The GBPUSD pair has broken below a rising trendline today and given the rising uncertainty surrounding Brexit negotiations there could well be more downside ahead towards the August low of 1.2665. Source: xStation