A1 Trading Company

May 24, 2022

Sterling Suffers Sharp Decline Right After This

Frank Cabibi

The British Pound fell sharply after an unexpected report on PMI data missed expectations by way more than what was forecasted. Most pound pairs are down as GBP/USD dropped -0.62% today. The sterling suffers one of the hardest drops in a long time.

Higher Costs, Slower Growth, and Shaky Economy

Purchasing managers lost momentum for the month of April after a manufacturing PMI reading of 54.6 which missed estimates by 0.4, while services reported 7.1 points lower than March.

https://tradingeconomics.com/united-kingdom/manufacturing-pmi#:~:text=Manufacturing%20PMI%20in%20the%20United,points%20in%20April%20of%202020.

Costs in England have been the highest level in the past few decades. CPI is the highest it has ever been in history which has kept the economy from really improving at all. Businesses have been borrowing less money due recent inflationary concerns and this has caused companies to slash expectations this year. They have also had to increase wages significantly this year so a lot more money is going towards employees. Even with a much higher interest rate than in 2021, stagflation still remains a predominant issue for Great Britain.

Price Action

The pound's behavior has done very poorly against the dollar as outlook continues to be weak. Year-to-date, GBPUSD is down nearly 7.5% and 12% down from the 2021 highs. The overall trend for the currency is a strong downtrend which is struggling to spark a shift in momentum. Every attempted bounce results in another sell off to new lows, so traders on the short side have been able to pick up sell positions at these opportunities.

GBP Trade Setups

GBP/USD (Short Bias)

GU is stuck at a resistance level on the 1D as it has seemed to form a lower high. It looks like the pair is set up for another sell opportunity although the pair has been performing relatively well this past week or so. Due to the strong overall trend to the downside, this bounce in price could be a chance to hop in on the short side once again.

GBP/JPY (Long Bias)

The pound still looks bullish compared to the yen although sentiment is mostly risk-off. The pair has had some more volatile swings this year, but ends up forming higher highs and lows. Price is currently on support which could end up maintaining at this level, but if not, the 200 DMA lies right below that.

GBP/CAD (Long Bias)

GBPCAD might have found a bottom if we zoom far out and find this bottom from September 2019. The past 4 days look promising for the pair although it is hard to tell for sure. However, this level does look heavily discounted within the past 3 years. If price can hold above 1.60927, this might be a bullish sign for the pair going forward.

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