Pound to Dollar Rate's Recent Plunge a Case of "Too Far, Too Fast" as Markets Focus on Friday's NFP Data

pound exchange rate 1

We hear that the recent plunge in the GBP to USD exchange rate has overextended; if true the pair could be afforded some relief ahead of some big ticket US data dumps.

  • Pound to dollar rate today = 1.4429
  • US non-farm payroll data dominates the outlook - what should you expect?
  • Analysts see 1.44 as offering solid support over coming days, moves below here unlikely

GBP has suffered a spike of volatility over the course of the past 48 hours with a decisive break lower in the GBP/USD exchange rate coming after ORB International issued their latest survey poll on the UK's referendum on continued European Union membership.

The margin between the two camps has narrowed as 51% said they would vote in favour of remaining inside the EU, whilst those wishing to leave improved to 46%, with 4% remaining divided.

In ORB’s previous poll on 23 May, 55% were for staying whilst 42% wanted to leave, with 3% undecided.

GBP/USD is currently trading in the late 1.44s and looks set to struggle.

The move has caught many in the market by surprise.

"The anticipated GBP weakness exceeded our expectation by taking out the major 1.4400 support (low of 1.4385)," says Quek Ser Leang, an analyst with United Overseas Bank in Singapore.

However, Ser Leang believes the selloff may now be overdone:

"While further weakness is not ruled out, the sharp drop that started two days ago are clearly over-extended and any down-move would be likely be at a slower pace and last month’s low of 1.4330/35 is not expected to come into the picture for now.

"Resistance is at 1.4460 but only a move back above 1.4505 would indicate that the downward pressure has eased."

Citing the importance of 1.4400 as support is Yann Quelenn at Swissquote Bank who says a rebound should take place from this level:

"Hourly resistance is located at 1.4770 (03/05/2016 high) while stronger support is given by 1.4404 (15/05/2016 low)."

Quelenn says he expects the pair to show renewed bullish momentum toward resistance at 1.4770 if support at 1.4404 is not monitored.

EU Referendum: The Advantage Changes

There was always a sense that the swing to Remain in the polling would have to ease.

The latest Brexit polls have seen a tightening in the difference between the two camps, with ‘Remain’ leading by only 5 points at 51% to ‘Leave’s’ 46%. Remain’s struggle to establish a significant lead over Leave is scaring investors and weighing on sterling:

“The latest opinion poll in the Telegraph newspaper has revealed a narrowing in the poll lead for the Remain campaign. Of those certain to vote the differential between remain and leave has contracted to just 5%, near the statistical margin of error. Support for remain has retreated by 4% to 51% while exit gained 4% to 46%, it appears that the recent focus on immigration has boosted the out campaign.”

PMI Data Dominates Economic Front

Data due at the start of the new month is unlikely to sway GBP in a positive manner. 

UK Manufacturing PMI came in at 50.1, beating analysts expectations for another sub-50 reading. However, sterling hardly reacted, possibly because the manufacturing sector only accounts for about 10% of the UK economy. No doubt the Services PMI due out on Friday will likely have more of an impact.

Meanwhile, a steady stream of improving US data, increasing the possibility of a June interest rate rise and it makes for a bearish combination for cable:

“A combination of a degree of poll tightening, likely as the event comes nearer, allied to weak PMI, look for another month of below 50 in manufacturing PMI extends risks of Q2 GDP easing back towards 0.2%. We would view such a scenario as favouring continuing to sell into GBP rallies,” says Stretch.

Rather than continue higher to test the 200-day moving average at 1.4770 Stretch sees a greater likelihood of a correction developing back down to 1.4460 where a significant support line from the Fibonacci 61.8% retracement level of the previous rally is situated:

“We see little reason for GBP/USD to break overnight highs, let alone test the 200-day moving average at 1.4755. Rather we would look for Sterling to ease back lower towards 1.4530 and below there towards 1.4460, this marks the 61.8% Fibonacci retracement level of the year to date range; the latter is on the assumption that US data remains robust.”

US Dollar Faces Deluge of Labour Market Data

The big event for the US dollar complex over the next 24 hours will be the release of the latest set of employment and wage data from the US economy.

Ahead of US non-farm payrolls tomorrow and post the publication of the Fed’s Beige Book for the June 15 FOMC the data highlight today comes in the form of the May ADP employment report.

After April’s disappointing 156k gain the market is expecting a moderate rebound, to around 173k. However, such an advance will still leave the indicator running well below the 12m MAV, which currently stands at 203k.

The ADP employment reading comes in the wake of the Beige book describing growth as only modest in most of the 12 districts.

While consumer spending is expected to increase modestly tight labour markets were noted amidst discussion of rising demand for labour. We would note that investors should not ignore references to growing price pressures.

Expectations for a June move have moderated despite the firmer manufacturing ISM reading, the gain helping the economic surprise index advance to the highest level since mid-April.

"While we have seen the DXY retreat from testing the 100-day MAV at 95.96 we would maintain a positive USD bias unless we were to see the DXY slide through strong support at 94.85. For today unless we register an ADP outturn materially away from expectations look for investors to keep their powder dry ahead of  the NFP release tomorrow," notes Jeremy Stretch at CIBC Markets in London.