A Tale of Two Patterns

POUND STERLING ANALYSIS & TALKING POINTS

• Upbeat BRC retail sales unable to deter market focus on China.
• UK PMI to drive GBP/USD later today.
• Head & shoulders vs falling wedge.

GBPUSD FUNDAMENTAL BACKDROP

The British pound is now back below the 1.2600 handle once more despite some positive BRC retail sales data (see economic calendar below). The release printed the highest percentage increase since April and reflected a brief bout of optimism by consumers, spending large on food, health and beauty. The summer months may have contributed to this uptick in spending as well as moderating UK inflation.

While retail sales numbers were strong, the pound has yet to find support from markets due to Chinese services PMI’s slumping to its lowest level this year. The 51.8 read is swiftly approaching the midpoint 50 level that separates expansion from a contracting services sector. Recent Chinese economic data has been supportive of this slowdown and growth concerns continue to gain traction. The Chinese government has since issued statements to stimulate the economy but without any significant changes just yet, markets remain cautious.

Later today, UK PMI’s will come into focus but with estimates expected to hit 2023 lows, cable may be in for further downside to come. The upcoming US sessions should also provide some added volatility to markets after US Labor Day yesterday.

GBP/USD ECONOMIC CALENDAR (GMT +02:00)

Source: DailyFX Economic Calendar

The Bank of England’s (BoE) market pricing (refer to table below) remains steadfast on a 25bps interest rate hike for September although the probability has softened from close to 100% to around 88% at present. With one more labor and CPI report prior to the rate announcement, I do not anticipate any change for September but a further drop in inflation and a weakening labor market may see some significant repricing thereafter.

BANK OF ENGLAND INTEREST RATE PROBABILITIES

Source: Refinitiv

TECHNICAL ANALYSIS

GBP/USD DAILY CHART

Chart prepared by Warren Venketas, IG

Price action on the daily cable chart above sees the pair sandwiched between a longer-term head and shoulders (black) and a short-term falling wedge (light blue). The latter tends to favor and upside breakout that could invalidate the H&S but the present state may favor a H&S breakout below the neckline. Bears have been tentative in their pursuit of a bearish breakout and I will be looking for a confirmation close below the 1.2548 swing low as a precursor to another leg lower.

Key resistance levels:

• 1.2900
• 1.2848
• 50-day moving average (yellow)
• 1.2680/Wedge resistance

Key support levels:

BULLISH IG CLIENT SENTIMENT (GBP/USD)

IG Client Sentiment Data (IGCS) shows retail traders are currently net LONG on GBP/USD with 57% of traders holding LONG positions (as of this writing).

Download the latest sentiment guide (below) to see how daily and weekly positional changes affect GBP/USD sentiment and outlook!

Contact and followWarrenon Twitter:@WVenketas