- Despite COVID-19 and a slowing economy GBPUSD pushed higher
- Market sentiment is bearish in the very near-term, this will give way
- The impact of any Chinese retaliation will not be as bad as feared
- The muddle in the U.S. suggests Sterling can find a new leg higher
Sterling drove higher during the last week on July and held the ground above both the 50- and 200-day moving average.
There may well some short-term selling of the Pound as we look to the Bank of England inflation report and Monetary Policy Committee meeting on Thursday. I cannot see any unexpected rate action as Base should be held at 0.10% even if the PMI readings show a good bounce on Wednesday.
On Wednesday we expect the Composite PMI to be reported at 57.1 up from 47.7 and the more important Services PMI to be called at 56.6, up from 47.1.
Any rebound must be taken as a singular piece of good news as the new UK coronavirus restrictions will certainly test optimism over economic recovery and we have to wait until August 12 for GDP growth. We know that the economy contracted by approximately 25% in March and April and even if there were a decent level of activity in May and June the economy must have been in the region of 12% to 14% lower that the pre-crisis level at the start of Q3.
Will that really derail GBPUSD? After all the U.S. declined at a 32.9% annual rate between April and June as the lockdown and consumer spending cutbacks endured during the pandemic bit hard. This marked the deepest decline since the government began keeping records in 1947 and is worse than the prior record of -10% set in 1958.
The hope was that following the sharpest drop in Q2 there would be a recovery thereafter. However, as virus cases in the U.S. surge, some areas re-impose restrictions on activity and the White House appears out of touch the rebound is showing signs of stalling.
The China Syndrome
The impact of any Chinese retaliation against the U.K. is yet to be seen. Rows over Hong Kong, the ban on tech giant Huawei playing a role in the 5G network, and British criticism of human rights abuses in Xinjiang have soured the relationship in recent weeks.
Beijing’s ambassador, Liu Xiaoming, acknowledged that the rows had “seriously poisoned the atmosphere” of Sino-British relations. That said, China only accounts for 4.8% of U.K. exports although the nation takes 9.3% of its imports from the People’s Republic.
The Way Ahead
Sterling has its detractors and whilst the government has not handled COVID-19 with a total success the lessons are being learned and if the country must endure further lockdowns the measures will be taken and implemented swiftly. I therefore look for a new push higher once the soft bulls have been shaken out of the market. Target 1.3734.