Will GBP/USD Reject 1.40 On Labor Data?

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

Although U.S. stocks ended the day in negative territory, the traded higher against all of the major currencies. There were no exceptions as the greenback powered higher on the back of a restrained decline in U.S. equities. The ended the day down 250 points but the decline in the was more modest. The important technical levels that we mentioned on Monday (2,750 in the S&P 500 and 25,500 in the Dow) continue to hold, which means currencies and equities are still vulnerable to a deeper correction. FX traders should be watching stocks carefully as the next directional move will determine how the majors trade. No U.S. economic reports were released today but Markit Economics’ PMI reports, and the are scheduled for release tomorrow. These reports should help the dollar hold onto its gains because if you recall, at her last Federal Reserve meeting, Janet Yellen and her team upgraded their inflation outlook and touted the improvements in the economy. Existing home sales should also recover after falling at the end of last year. With all of this in mind, 107.50 is an important resistance level for and an ideal place for profit taking after a 200-pip rally from last week’s low.

Of all the major currencies, was the most resilient in face of . Although the Confederation of British Industry’s came in weaker than expected, which is a sign of slower manufacturing activity, pound sterling was supported by the U.K. government’s hope that a Brexit deal will be done by the end of the year. We are confident that a deal will be made in 2018 as well but it will be a long road from here. For now, the focus will shift to U.K. data as Wednesday’s will determine how quickly the Bank of England raises . Speculators are banking on a move in May but if Wednesday’s labor data fails to live up to expectations, those odds, which currently sit at 76% could sink quickly. According to the PMIs, January was a very strong month for job growth but everyone’s focus will be on as it’s a measure of inflation. Average weekly earnings growth has been hovering at its highest level in 2017 for the past 2 months. That’s difficult to maintain so if wage growth slows, we could see a more meaningful correction in GBP/USD. Bank of England Governor Mark along with monetary policy committee members , and will also be testifying on the Inflation Report before the Parliament’s Treasury Committee so expect some market-moving comments. The labor data will determine whether GBP/USD recaptures 1.40.

As for the , if Eurozone PMIs fall short of expectations and the rallies on the back of the , EUR/USD could drop as low as 1.22. After the recent weakness and volatility in the , it was no surprise to see German tumble in February. also took a hit according to the Eurozone’s latest report. February PMIs are scheduled for release tomorrow and slower growth is expected in the and sectors. How EUR/USD responds will be dictated by the degree of weakness. If the data only misses slightly, investors may chalk it up to a pullback after a series of strong months. If there are steep declines, EUR/USD will sink to 1.23 with risk of dropping to 1.22 if the FOMC minutes take the dollar higher.

All 3 of the commodity currencies traded sharply lower against the greenback. The was hit the hardest as the surprise decline in point to a weaker on Thursday. has now broken above the 100-day SMA, which means the rally could extend as high as 1.27. The was driven lower by but the main focus will be on the RBNZ Governor’s speech before the finance and expenditure committees this evening. If there are no market-moving comments, NZD/USD could extend its decline down to .7275. The hit a 4-day low, paving the way for a deeper decline toward 78 cents. The from the last RBA meeting did not have a significant impact on the currency. While the central bank only sees inflation rising gradually, they also felt that domestically and globally, data has moved in a generally positive direction.