A few weeks ago, I wrote a piece talking about the positive surprises to the UK data, especially to GDP, Retail Sales and Employment. But all that has now changed.
We are now starting to see all those key data points shift lower as we begin to see substantial changes to pricing of cuts by the Bank of England.
If the GBP is getting weaker, which currencies could we take advantage of if against and why?
1. GBP Data Takes a Turn for the Worst
Over the past week we have seen some key economic drivers for the UK start to surprise lower. Some of these include:
· GDP Growth down to -0.3% from 0.2%.
· Goods Trade Balance -23.3B up from -19.9B.
· Industrial Production -0.6% vs the -0.4 forecast.
· Claimant Count Change 33.1 vs -21.1 previously.
· Core CPI 3.5% vs 3.8% previously.
As we can see some key data points are starting to miss lower, and this was reflected in the British Pounds pricing recently, as GBPUSD traded lower yesterday breaking key support points.
Upcoming data looks a little bleak too, retail sales on Friday is forecast to come in much lower at -0.5% vs the previous 1.2%.
2. Bank of England Rate Cut Expectations Rise
The Bank of England meet tomorrow to decide on the current interest rate, with forecasts suggesting practically no possibility of a rate cut is coming. However, odds of a rate cut in the next meeting (August) have climbed to nearly 80%.
This can also be seen in the bond markets, with UK02Y now trading at 3.88% vs the current interest rate of 4.25%.
The recent increase in payroll taxes could be the key driver behind the British Pounds poor form.
3. Currency Strength Meter Opportunities
If the GBP continues to weaken, we need to identify currencies that are getting stronger, as we know all forex markets trade in pairs.
The Australian dollar and New Zealand dollar stand out to me the most right now for bullish opportunities, and this is reflected by my analysis on my forex heatmap.
The currency strength meter pointed out GBPAUD, GBPNZD and GBPCAD for selling ideas, and GBPNZD has caught my attention.
Looking at the weekly chart of GBPNZD, we can see the price has broken through a key trendline support that formed form the lows in December of last year.
This weekly candle as it stands looks very negative, with the price trying to break through support and lows between 2.2300 – 2.2200.
A break below these levels could see the price trade down towards 2.1800.
Key Takeaways
The UK economic data is beginning to miss to the downside prompted traders to short GBP.
The Bank of England’s rate cut chances in August have risen substantially.
Currency strength meter analysis points to AUD, NZD and CAD as the stronger currencies to the GBP, with GBPNZD in particular looking very bearish.
