The GBP/USD continues to lose ground in early trading today and the depths of the forex pair are bringing into view long term perspectives.

The GBP/USD is traversing near the 1.17500 level as of this writing.  Yesterday’s high of nearly 1.18310 began to wave early and support levels have continued to prove vulnerable. On the 17^th and 18^th of August the GBP/USD was still above the 1.20000 level and some speculators may have thought support lines could be held at those ratios. However, selling of the GBP/USD continues to grow and its pace downwards yesterday certainly quickened.

Long term charts and historical perspective will be debated as the value of the GBP/USD currency pair is challenged.  During coronavirus and the days of the Brexit chaos the GBP/USD did test low depths, but both those events were overcome. The forex pair was able to climb and reached what many financial houses – particularly in the U.K – believe was a more ‘reasonable’ equilibrium between 1.30000 and 1.40000 with outliers being seen on occasion. The price of the GBP/USD is now lower than it was during the worst of Brexit fears, when the 1.19000 ratio came into sight.

Coronavirus, Brexit and Ronal Reagan Topics of Discussion with GBP/USD

During coronavirus the GBP/USD sank below the 1.15000 level in March of 2020, but by September 2020 the currency pair was again above 1.30000. Traders and financial houses this time around may not believe a quick turnaround should be expected. Putting aside Brexit and coronavirus, the last time the GBP/USD traded this low was when Ronald Reagan was President of the U.S and Margaret Thatcher was leading the U.K. The USD was strong at that time due to massive growth created by Reagan’s economic policy. The GBP/USD touched the 1.05000 level in January of 1985.

• Decision on U.K Prime Minister will be known on September the 5^th.
• Can the BoE keep pace with the Fed to safeguard value of the GBP/USD?

Traders Looking for Reversals Higher Short Term in the GBP/USD need to be Careful

The GBP/USD does appear to be oversold from a historical perspective.  The GBP/USD has a long track record of trading at much higher values. However, short term traders who believe the forex pair is suddenly going to turn around and march higher need to keep their ambitions in check. Economic events are turbulent. U.S Federal Reserve policy remains unclear, but will likely remain hawkish over the next few months. And the decision regarding who will be the next Prime Minister of the U.K will be decided in a little less than two weeks.

Coming events this week via the central bankers meeting in Jackson Hole, Wyoming will factor into Forex via speeches made. The long term lows being tested by the GBP/USD are certainly attractive as speculative wagers, but traders should remain conservative. Psychological marks like the 1.17000 level may become a factor. If the 1.17300 mark is suddenly tested and the 1.172500 level were to prove weak, this could set off additional alarm bells. Traders need to use total risk management and keep their targets realistic. Looking for upside movement via natural reversals higher may seem tempting, but in the short term should be done with extreme caution.

GBP/USD Short Term Outlook:

Current Resistance: 1.17500

Current Support: 1.17400

High Target: 1.18240

Low Target: 1.16900

Amid the continuation of record bearish pressure for the EUR/USD currency pair, investors and markets in general are preparing for an important and historic trading week. The US Federal Reserve will raise interest rates according to expectations by half a point, and it may be amazing to do more than that in this week’s meeting. This path often helped the US dollar to achieve record gains, which brought it, along with the euro-dollar pair, to the 1.0470 support level, the lowest in five years, and it will start trading this important week by stabilizing around the 1.0546 level.

The EUR/USD exchange rate is set for its biggest one-month drop since March 2015 after another week of accelerating losses, and research by Barclays Bank indicates that it is the risks to European energy supplies that have made the single European currency at “low levels”. The performance of the EUR ignored Eurostat figures which showed inflation in food and non-energy prices rose sharply during the month of April after the economic performance was slower than expected in the first quarter.

The price of the euro against the dollar was still bearing heavy losses during the trading week and was on its way to achieve its largest loss in one month since shortly after the European Central Bank (ECB) first started quantitative easing during the first months of 2015. “In our March forecast, we set a forecast path that allowed some moderate downside for EUR/USD in the near term, to 1.09,” said Themistocles Futakis, Head of FX Research at Barclays Bank. But this quick slide in April to 1.06, despite recognizing a host of catalysts that we thought would boost the euro, was beyond our expectations.”

The Euro’s losses increased rapidly after reports that Russian gas supplies to Poland and Bulgaria had been halted.

Both have reportedly refused to comply with the terms of a Kremlin decree requiring them to open accounts with Gazprombank in which euro-denominated payments for Russian gas are converted into rubles in Moscow and by state-owned energy giant Gazprom.

The recent power outage was followed by potentially false market speculation that the same factors noted above may soon lead to other European countries also cutting off Russian gas pipelines, which will be a significant event for the Eurozone economy. Many economists predict that any abrupt interruption of energy supplies would hamper economic activities and create great difficulties for businesses and households, which is why energy has not been targeted as part of any European sanctions due to the Russian invasion of Ukraine.

According to Barclays experts, “There are certainly other technical forces in the near term at work. For example, the US dollar is naturally more effective than the euro for domestic cyclical forces than for global forces. As such, the depreciation of the Chinese yuan is driven by the fact that, relative to other factors, the growth shock from China’s COVID policies has a more profound impact on the euro.”

“But even so, this is the shock of COVID. And as we’ve seen, COVID order damage tends to be corrected by a compensating increase on reopening. In this sense, we will not chase the EURUSD to fall from very cheap levels based solely on the COVID shock. With that said, a disruption to natural gas flows due to Russian ruble payments would be even more disruptive to the euro.”

Barclays’ latest forecast released in March looked for EUR/USD to trade near 1.09 during the second quarter, effectively bottoming out a downtrend that started in January 2021 before giving way to a recovery back towards the 1.15 handle by the end of the year. So far, Barclays has not deterred these expectations, but has warned clients that if the ban or any other factor disrupts gas supplies to Europe, it will “meaningfully revise our outlook for the euro against the dollar”.

According to the technical analysis of the pair: In the near term and according to the performance of the hourly chart, it appears that the EUR/USD is trading within the formation of a relative bullish channel. This indicates a significant short-term bullish bias in market sentiment. Therefore, the bulls will target short-term gains at around 1.0573 or higher at 1.0611. On the other hand, the bears will look to pounce on a potential pullback at around 1.0510, or lower at 1.0472.

In the long term and according to the performance on the daily chart, it appears that the EUR/USD is trading within the formation of a sharp descending channel. This indicates a strong long-term bearish bias in market sentiment. Therefore, the bears will look to ride the current series of declines towards the 1.0384 support or lower to the 1.0231 support. On the other hand, the bulls will look to pounce on long-term profits around the 1.0707 resistance or higher at 1.0871.

Some investors are bullish on the Australian dollar, even though there are still concerns regarding the Reserve Bank of Australia’s Bond Purchase Program. 

The Reserve Bank of Australia announced its decision to keep the interest rates unchanged at 0.1 percent, leaving them at a historical low and in line with analysts’ expectations.

Reserve Bank Governor Philip Lowe announced that the governing board is not planning to raise cash rate levels over the next three years. He also announced the governing board’s decision to leave its Bond Purchase Program under review, highlighting its willingness to do more if it’s required.

Economic Calendar

Beyond the RBA’s announcement, this week has been somewhat slow in terms of the economic calendar. On Monday, the University of Melbourne reported that securities inflation went up by 1.4 percent (year-on-year) in November, after climbing by 1.1 percent in the previous month. In monthly terms, it went up by 0.3 percent, after shrinking by 0.1 percent in October.

The Australian Industry Group reported that the Australian manufacturing sector expanded at a slower pace in November, as the manufacturing index stood at 52.1 after being at 56.3 in the previous month. The Commonwealth Bank Manufacturing PMI, released by both the Commonwealth Bank of Australia and Markit Economics, signaled an expansion of the banking sector at 55.8 in November, though lower than expectations of 56.1.

The RBA reported that private sector credit went up by 1.8 percent in October (year-on-year), after gaining 2.4 percent in the previous month. In monthly terms, the figure remained unchanged.

On Tuesday, the Australian Bureau of Statistics reported that building permits rose by 3.8 percent in October (month-on-month) after an increase of 16.2 percent in the previous month and higher than predictions of a 3 percent contraction. In yearly terms, building permits went up by 14.3 percent, after climbing by 8.8 percent in the previous month.

Australian Dollar Languishes

So far this week, the Australian currency has had a poor performance, losing by 0.49 percent against the US dollar and breaking a four-week gaining streak. November ended up being a good month for the Aussie, in which it gained 4.54 percent against the greenback and recovered from a two-month losing streak.

The late volatility of the Aussie can be linked to the most recent news from China. The Asian country reported that its manufacturing sector expanded in November, as the Manufacturing PMI went up to 52.1 and above expectations of 51.5. Similarly, the services sector expanded, with the non-manufacturing PMI standing at 56.4, also higher than expected.

This ended up being good news for the Aussie, which opened the week in positive territory, though posting mild gains. Nevertheless, the Aussie’s early advances were undermined by the US government’s decision to add two Chinese firms to its defense blacklist, further affecting the already complicated trade relationship.

Some investors are bullish on the Australian dollar, even though there are still concerns regarding the Reserve Bank of Australia’s Bond Purchase Program. An example of this is Morgan Stanley’s expectation that the upcoming global economic recovery will end up benefiting risky currencies like the AUD.

“Combinations of strong growth, ample global liquidity, and a solid fundamental outlook for risk assets suggest that risk-correlated currencies should continue to see tailwinds,” reported an analyst at Morgan Stanley.

Nevertheless, this possible trend could be undermined by the Reserve Bank of Australia, as the excessive appreciation of the currency could end up being prejudicial for the Australian economy.

Economy Currently on Path Towards Recovery

According to the most recent data, the Australian economy has been struggling with the consequences of the coronavirus pandemic. The latest gross domestic product figures, released at the beginning of September, showed that the economy contracted more than expected, shrinking by 7 percent (year-on-year) after decreasing by 0.3 percent in the second quarter. In yearly terms, the figures followed the same trend, falling more than expected at -6.3 percent, after climbing by 1.6 percent in the first quarter.

All eyes are now on the upcoming national accounts report, which is set to be released by the Australian Bureau of Statistics on Wednesday. The surveyed analysts expect a 2.6 percent expansion (quarter-on-quarter), as well as a yearly 4.4 percent contraction.

Inflation is currently under control, as the latest Consumer Price Index figure stood at 0.7 percent (year-to-year), in line with polled analysts’ expectations and higher than the previously reported -0.3 percent. Despite being congruent with analysts’ forecasts, the figure is still way behind the Reserve Bank of Australia’s target, which is currently a 2-3 percent range.

On the other hand, the latest unemployment rate was better than expected at 7.0 percent in October, though an increase from the previous month’s 6.9 percent.

In its latest release, the Reserve Bank of Australia reported that data “have generally been better than expected” and that Australia is currently on the path towards an “uneven and drawn-out” economic recovery. This recovery is also heavily dependent on policy support which, given the latest inflation and unemployment data, will be needed for some time.

Upcoming Events

• Tomorrow, the RBA’s governor Phillip Lowe will be giving a speech at 00:00 GMT.

• Also tomorrow, the Australian Bureau of Statistics will release the gross domestic product figures for the third quarter.

• On Thursday, the Australian Bureau of Statistics will report October’s trade balance, followed by exports and imports of goods and services figures.

• Retail sales figures will be released by the Australian Bureau of Statistics on Thursday.