GBPUSD looks to dollar for direction

With UK economic data being slightly lower in quantity over the upcoming days, the Cable will continue to look to the dollar for direction. The Cable itself remains under pressure and vulnerable to further declines, especially with the US employment report at the end of last week providing the markets with optimism that we can expect a US interest rate rise from the Federal Reserve this September. While the pound is usually attractive to traders because of the strong UK economic outlook, this has become questionable recently and has consequently resulted in the currency suffering with hesitation from buyers.

Investors have reacted unfavourably to repeated indications that UK economic momentum is slowing down and while there was previously optimism that GDP growth would rebound strongly in Q2, this has been challenged by recent data. There is still disappointment with last week’s Services PMI falling significantly below expectations, with further bearish pressure following the Confederation of British Industry (CBI) cutting its UK growth forecast for 2015. When the UK’s usually consistent economic outlook comes under scrutiny, you suddenly see that the pound suffers from a lack of attraction and this is exactly what is currently taking place. All in all, the pound finds itself in an unfortunate situation where the majority of potential upside gains appear limited to dollar weakness. This is also the case for emerging market currencies, which is hardly encouraging when you consider the complete punishment these currencies have received as we approach the timing of a US interest rise from the Federal Reserve.

After dropping to a two-month low, gold has managed to rebound slightly at the beginning of the week. Although the US NFP provided the markets with the green-light to expect an interest rate rise from the Federal Reserve this year, the small upside bounce is likely correlated to an acknowledgment that the pace of US interest rate rises will still be painfully slow. There is even potential for gold to continue rise later this week when the latest US retail sales data is released on Thursday. The USD will be vulnerable to another round of aggressive profit-taking if the retail sales data continues to expose that there is no correlation between substantial job creation and improved consumer confidence readings resulting in consumer spending.

Reduced consumer spending is actually the largest weakness I currently see in the US economy, which is quite a concern when you consider that consumer spending also represents the largest component of US GDP. Even if retail sales disappoints once again, I still expect the Federal Reserve to raise rates, but it will provide the markets with another reason to expect the pace of interest rate rises to be extremely slow.

The strongest downside risk for metals would be if there is a complete surprise to the upside for retail sales, which would provide further optimism that GDP is recovering its losses from the previous quarter and might even encourage ambitious traders to punt on the possibility that there could be a surprise move from the Federal Reserve in June. A rate increase this month would be completely unexpected and you would have to be really ambitious to even think that it is possible. Moreover, a rate increase this month has not been priced into the dollar and it is when events occur that have not been priced in, that investors need to be alert for sudden volatility.