British Pound (GBP): Sterling in Sharp Decline, How Deep Will the Pullback Extend? 03/02's Coverage

PMI Construction (Jan) is due tomorrow; we will need a good beat on the expected 61.5 being factored in by markets. I would imagine that expectations are pretty low after today's miss on the Manufacturing PMI and the subsequent fire-sale of sterling.

Shaun Osborne from TD Securities on the outlook for the pound vs Canadian dollar:

"GBPCAD losses have extended a little more today, leaving the GBP resting right on support at 1.8050—a key, short-term pivot point for the market. Short-tem, losses are likely to extend a little lower through to the high 1.79s at least, but we still rather think that the broader trend higher is so deeply entrenched in the market that scope for a significant correction lower remains limited at the moment. Monitor, look for buying opportunities."

Today's sterling sell-off appears to be more an expression of the need for a correction to the rally than a fundamental vote of no confidence.

The UK Manufacturing PMI was the trigger, however, Alex Conroy offers this timely comment:

"(The PMI) survey showed new orders were flooding in; this was welcome news for policy makers after mounting criticism on the recoveries reliance on consumer spending. Despite missing forecasts PMI is still running at one of the highest levels on record and signify a good start for the UK economy to the New Year."

This note from Swissquote Bank:

"GBP/USD continues to weaken. However, it is now approaching a support area implied by its rising trendlines (around 1.6353 and 1.6320). Horizontal supports can be found at 1.6396 (20/01/2014 low) and 1.6305 (25/12/2013 low).

"Hourly resistances stand at 1.6485 (intraday high) and 1.6526 (29/01/2014 low). In the longer term, the break of the major resistance area between 1.6381 (02/01/2013 high) and 1.6466 (10/12/2013 high) favours a bullish bias.

"However, given the overall overbought conditions, a break of the major resistance at 1.7043 (05/08/2009 high) is unlikely in the next weeks. A key support stands at 1.6305."

For those with a long term view on the pound dollar, consider this analysis and graph from the Afex research desk:

"The ramifications of EUR/USD dropping through 1.3300 (see below) would most probably be to restrict upside potential for GBP/USD in broad terms.

"This is not to suggest an extension to 1.6750 or 1.7000 cannot develop here but any such move would probably prove exhaustive so far as a developing range argument is concerned, if indeed an intermediate top has been posted already in EUR/USD terms.

"Sterling prices exhibited the same tendency (to remain within an extended holding pattern) following their previous notable sell-off in 1992 after which it took values more than 10 years to surpass 1.7000 again. From a short term perspective a drop through 1.6300 is required to imply an interim high with dips otherwise still seen as corrective."

A note on the matter issued by Matt Weller at GFT says:

"Unlike its mainland cousin, the GBP/USD has seen a bit of volatility to start the week. Rates have fallen sharply on a weaker-than-expected Manufacturing PMI report, and the pair is now trading down in the mid-1.6300s.

"For today, the next zone of support to watch will be from the YTD low and round handle around 1.6300-10; a bounce is possible off that level later today, so intraday traders should keep a close eye on the near-term price action moving through the North American session."

For those watching GBP/AUD, this analysis from Forex.com's Fawad Razaqzada is a must read.

Fawad Razaqzada at Forex.com on the deterioration in the GBP:

"The British pound against the Aussie and US dollars are among several currency pairs which suggest sterling has lost its mojo for now, at least from a technical point of view anyway. However the fundamentals do not fully support this outlook.

"It is the technicals that usually signal a change in sentiment. After all, one would argue that the GBP rally may have overshot to the upside on the UK recovery hype and that a sizeable pullback is now on the cards."

Ipek Ozkardeskaya at Swissquote Bank on the corrective move lower in GBP:

"Already heavy, GBPUSD cleared support at 1.6400 for the first time since January 17th and stepped in the daily cloud cover (1.6216/1.6388). We expect deeper downside correction pre-BoE. EURGBP rebounded from 0.82011 on divergence between Euro-Zone / UK PMI numbers. Trend and momentum indicators flattened. We keep our bearish view as long as the 21-dma resistance (0.82650) holds; with mid-term target set at 0.80820/50 (Jan 2013 lows)."

The British pound is sharply lower now - it has crashed below 1.21 vs the euro and is heading to 1.630 vs USD.

"GBP continuing to drop - no new newsflow - the mkt was obviously a little disappointed with the PMi number." - Steve Collins at London & Capital.

The pound to euro is headed south, Bill McNamara at Charles Stanley says the following concerning the outlook:

"The pound added just over 1% relative to the euro in January and, as the chart shows, this has brought it into contact with downtrend resistance, at 1.22 or so. In fact, it is worth noting that sterling has recently been as high as 1.223 so it is entirely possible that its upside momentum will lift it through that trend-line before too long. In the meantime, the 50-day MA should provide some support at around 1.20."

Expect the poor Monday for GBP to continue.

"UK manufacturing PMI is weaker than expected at 56.7 from 57.0, this is a touch disappointing, but still a high number. GBP lower." - Forex.com.

"Once again I must reiterate that these movements in emerging markets are the function of 4 or 5 different factors that have come together at the same time. Riots and political pressure in Ukraine and Thailand, alongside falling Chinese productivity, the possibility of a war in the South China Sea and the unknown market impact of a Federal Reserve reducing its asset purchases are the main drivers. This EM crunch is multi-headed but is unlikely to turn into an unbeatable Hydra." - Jeremy Cook at WorldFirst.

PMI Manufacturing, Euro Zone, Jan Figure released at 54, Forecast: 53.9, Prev: 53.9. GBP to EUR under pressure.

Ahead of the release of Markit Manufacturing PMI the pound exchange rate complex is under pressure on Monday morning. We are seeing a decent start to equity market trading here in Europe following a positive session in Asia overnight. There is no obvious factor to the selling apart from the observation that with markets in 'risk-on' mode we could be seeing funds flow out of the safe-haven GBP.

We see the likes of the Rand and Lira are slightly lower vs Sterling today, and we will continue to keep an eye on these two bellwethers of the EM sector.

A fresh month brings with it fresh data. The back-end of every month leaves sterling exposed to a external drivers owing to a dearth of significant data.

Today we get the release of Markit Manufacturing PMI (Jan) at 09:30.

Markets are looking for a healthy number of 57.0, down from a previous 57.3.

We suggest the risks are to the downside so even an on-target release will be of little aid to sterling bulls. The figure must come in above expectations to support GBP.

The euro will be under scrutiny this week with the ECB announcing the results of their February meeting on Thursday. This month's meeting will attract more scrutiny then has been garnered in recent months owing to decline Eurozone inflation. More and more analysts are suggesting some stimulatory measures may be introduced. This will help push the pound to euro exchange rate higher and keep the Euro complex under pressure.

Chris Towner, director at FX advisory services at foreign currency specialists HiFX comments on last week's week EU inflation figures:

"Europe continues to fall down a slippery slope as we saw inflation drop to a meagre 0.7%. This is an issue and needs further action. The question now is will the ECB cut rates to zero next week or as an alternative look to its toolbox for some quantitative easing. Europe is caught in a downward spiral with prices and the situation is not helped by a strong currency and high unemployment levels.

Both of these factors put downward pressure on inflation as a strong currency allows a country to import; deflation and high unemployment reduces any wage demand pressures. Europe is meandering down a similar path to that of Japan's lost decade. With further easing in Europe while the US tapers its quantitative easing programme, it’s no surprise to see EUR/USD drop and GBP/EUR push higher. In actual fact the only surprise is that the euro is not weakening more quickly!"

Some third tier data was released overnight. Hometrack Housing Prices increased 0.3% month on month vs 0.5% growth in the previous month.