Monday, August 1, 2016
All eyes will be on the Monetary Policy Committee of the Bank of England on Thursday, August 4. The MPC is widely expected to cut interest rates to a record low of .25%. This pending rate cut has already been reflected as savings accounts rates have been cut and promotional rates have disappeared across the United Kingdom. While the interest rate cut is almost a certainty, traders will eagerly be watching any announcement of a quantitative easing program as well as an expected downgraded forecast of the UK economy. The Markit/CIPS UK manufacturing index fell to 48.2 in July from 52.4 in June; a reading below 50 indicates contraction.
After the surprising outcome of the referendum to leave the European Union, the United Kingdom has been through over a month of unprecedented political and economic turmoil. The political shakeup has resulted in a new prime minister, cabinet, a new government ministry for EU negotiations, mass resignations from the Labour shadow cabinet, and an extremely contentious race for leadership of the Labour Party. Prime Minister Theresa May has walked an extremely delicate line, declining to specify a date when the United Kingdom will trigger Article 50, the two year process for a member state to leave the European Union. The Prime Minster has recently met with Angela Merkel of Germany and Francois Hollande of France to discuss the timing of EU negotiations.
Turning to the three month continuation chart, we see that the Pound has been in a very narrow trading range after the initial shock of the EU referendum wore off. Still, almost every technical indicator still shows a bearish trend for the Pound. The 20 day Simple Moving Average (SMA) has shown a steep downward trend, just recently leveling off due to the extremely tight recent trading range, and is well below the 50 day SMA. Although resistance is found at the pre-referendum levels of 1.50, that level seems almost impossible to reach and the short term resistance level of 1.35 seems more applicable to traders. Bulls can take some comfort in 14 day Relative Strength Index (RSI) as it is in neutral territory at 47.20
Dale Jennings, Commodity Analyst