The pound has extended its falls, hitting its lowest level against the US dollar since early June, after growth in the UK services sector unexpectedly moved down a notch in August, according to the closely-watched purchasing managers' index (PMI) by Markit. Although activity in the UK’s dominant sector rose as the PMI was above 50, the 55.6 reading was lower than July’s 57.4 and below analyst expectations of 57.6. The PMIs for the manufacturing and construction sectors have also disappointed expectations this week, making it a hat-trick of bad news for the UK economy. Investors are thus forced to push their expectations about a Bank of England rate hike further out. The only thing that could save the pound is if the ECB delivers an extremely dovish message today or if expectations about rate hikes in the US are also pushed out, say as a result of a disappointing ISM services PMI today or a poor August jobs report tomorrow.
Ahead of those key US economic numbers, our technically-minded traders will have realised that the pound has now arrived at an important technical juncture against the US dollar. For some odd reason, the GBP/USD has a tendency to react remarkably well around the 50% retracement level – more so than any other currency pair that I have noticed. The most recent and obvious example of this price behaviour was in June when price formed a top around the 50% retracement level of the entire 2014-15 downswing. Since then, it went into a laborious consolidation phase before making a failed attempt to break higher last month. It found strong resistance around 1.5815, leading to a sharp drop of about 575 pips from the high to today’s low.
Now, as mentioned, the Cable has arrived at another 50% retracement level – this time of the upswing from the April low, around 1.5245. As can be seen from the chart, price has already bounced off this level by a good 35 pips at the time of this writing, confirming the fact that traders respect the 50% retracement. But is this going to be just a “dead cat” bounce or will we see a major bottom form here?
If the GBP/USD posts a decisive break below this 1.5245 level today or on Friday then we may see a more significant sell-off towards the 61.8% Fibonacci level at 1.5085 or even beyond in the days and weeks to come. Conversely, a reversal looking daily candle here, if formed, could mark the end of the bear trend in the short term. That being said, the bulls will then want to see price push back above the key short term resistance levels such as 1.5340 (old support), 1.5360 (200-day SMA) and especially 1.5425 (support-turned-resistance) before turning confident about the outlook.