• Impulse decline on hold
  • UK GDP is expected to fall steeply in Q1

The common currency is currently trading at 0.8760 against the pound, representing a 0.50% uptick for the session on Monday. The euro cross logs the best intraday gain in two weeks as GBP lacks direction.

On Sunday, UK Prime Minister Boris Johnson eases some COVID restrictions and unveils three stages of the plan. The pound’s reaction was muted to his speech as the cable has been consolidating between 1.2650 and 1.2240 levels, and the EURUGBP remains between 0.8865-0.8680 levels.

The sentiment is improving as pound traders focus turned to the partial reopening of the UK economy, which should see activity improvement markedly over the coming weeks, whereas the recovery will be gradual in the second half of 2020. April PMI has continued to surprise, downside, unfortunately.

“April’s PMI data highlights that the downturn in the UK economy during the second quarter of 2020 will be far deeper and more widespread than anything seen in living memory,” according to Tim Moore, Economics Director at IHS Markit.

Both the IMF and the EC highlighted that the “UK GDP is expected to fall steeply in the first half of 2020, mostly due to the containment measures the UK government has implemented to combat the spread of COVID-19, before rebounding into 2021”. Economic indicators like GDP, inflation, and the Employment to fall sharply in 2020.

In its latest economic forecast, the European Commission said, Employment is expected to fall sharply in 2020 as a consequence of the containment measures. The unemployment rate, which reached a historic low in 2019 of 3.7 %, is therefore expected to increase to an average of 6.7 % in 2020. In 2021, unemployment is expected to fall slightly to 6 %. Consumer price inflation is forecast to ease to 1.2 % in 2020 from 1.8 % in 2019.

Data review: 

  • Service sector PMI registered 13.4 in April, down sharply from 34.5 in March, to signal a rapid decline in UK service sector output. The earlier’ flash’ reading for April was 12.3. Prior to the last two months, the survey-record low stood at 40.1 in November 2008, according to IHS Markit.
  • At its meeting ending on 6 May 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%, according to BoE. The MPC voted by a majority of 7-2 for the Bank of England to continue with the program of £200 billion of UK government bonds. Two members preferred to increase the target for the stock of asset purchases by an additional £100 billion at this meeting.

Data preview: UK’s Q1 GDP grab some attention. 

The latest survey data are indicative of GDP falling.

Historical comparisons of the PMI with GDP indicate that the April survey reading is consistent with the economy falling at a quarterly rate of approximately 7%, but we expect the actual decline in GDP could be even greater, in part because the PMI excludes the vast majority of the self-employed and the retail sector, according to IHS Markit.

TECHNICAL OVERVIEW

The impulse decline from March high has been put on hold. The sustainability of the subsequent bounce will largely depend on the response to the key near- support between 0.8680-0.8590 levels in the coming weeks.

The daily RSI and oscillator remain solid, suggest the risks of a new decline to supports located to 0.8680 and 0.8590 have eased dramatically in the next few days. We favor new rebounds to resistance at 0.8850-0.8865 ahead of 0.8900. A break of these last barriers would give an impulsive move higher, paving the way for a more pronounced rally to the resistances at 0.9020 and 0.9100 levels. 0.8680 and 0.8600 are the two key support levels to focus on.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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