GBP/USD Headed Below 1.30

GBP/USD Headed Below 1.30

GBP/USD Headed Below 1.30

Sterling was the only currency to end the week stronger versus the U.S. dollar but we believe there will be a deeper correction in the coming week. After Britain decided to leave the European Union, investors around the world braced for economic Armageddon in U.K. and while the flash PMIs surprised to the downside, the rest of the data hasn’t been terrible. According to the British Bankers’ Association consumer credit rose at its strongest pace in nearly 10 years as shoppers hit the stores and took advantage of low interest rate loans. This shows that while Brexit may have hurt the housing market it hasn’t had a major impact on consumption. Given how far sterling has fallen post Brexit this past week’s price action is mostly indicative of profit taking. In the coming week U.K. manufacturing and construction sector PMIs are scheduled for release. While construction sector activity may have slowed, the recent improvements reported by the Confederation of British Industry tell us that manufacturing activity remains healthy. With that in mind, sterling will continue to find resistance below 1.33. So far the economic impact of Brexit has been limited but if there are more headlines about Prime Minister May invoking Article 50 early next year, GBP/USD could extend its losses quickly.

Technically, GBP/USD rejected the 50-day SMA and is now on its way to the August 19 & 22 low near 1.3025. We don’t see anything stopping a move that could take the pair below 1.30. As long as GBP/USD holds below the 23.6% Fib retracement of the June to July decline, a deeper correction appears very likely.

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