Sterling received a lifeline on Wednesday following March’s solid Service PMI figure of 55.00 which boosted some confidence towards the health of the British economy. UK services activity in March has logged its strongest increase this year and such may mitigate the Brexit jitters as concerns momentarily ease over a slowdown in economic momentum. While the sharp jump in UK services is undeniably impressive given the Brexit uncertainty, some fears may linger over the decline seen in manufacturing and construction PMI this week. Although economic data from the UK continues to display post-Brexit resilience occasionally, the possibility of growth decelerating in the first quarter of 2017 may weigh heavily on sentiment. Despite today’s upsurge in prices, Sterling could still be destined to sink lower as the Brexit fueled uncertainties haunt attraction towards the currency.
Speaking of uncertainty, the battle of words between politicians on the Brexit topic has started with a bang as debates take place in Strasbourg. With the European Union setting out its “red lines” for the Brexit negotiations and emphasizing how the divorce terms must be agreed before striking any new trade deals, a rocky road may lie ahead. The worrying fact that the EU continues to demand a £50 billion Brexit divorce bill before any proper talks are in place may heighten concerns over the bloc playing hardball in the negotiation. With Manfred Weber who is a member of the European Parliament already demanding that Britain must give up the right to clear euros once it leaves the European Union adding to the messy mix, Sterling bears remain in close proximity to attack.
Focusing on the foreign exchange outlook, Sterling/Dollar trades within a sticky range with 1.2370 acting as a support and a resistance at1.2570. Although Dollar weakness has the ability to elevate prices higher, the uncertainty and tepid buying sentiment towards Sterling could inspire sellers to attack prices lower in the medium to longer term. On the daily charts, bears must conquer the 1.2370 support level for a further decline towards 1.2200.
In an alternative scenario, a breakout above 1.2570 may signal a defeat to the bears in the short term with the next target at 1.2650. Investors should keep in mind that the Brexit developments and concerns of a hard Brexit may ensure Sterling remains depressed for prolonged periods. Based on this hypothesis, when zooming out onto the weekly timeframe, the long-term bears remain in control below the major 1.2775 resistance level.
ADP and FOMC minutes in focus
The Greenback was on standby on Wednesday with the Dollar Index hovering around 100.50 ahead of the ADP report and FOMC minutes this evening. It is becoming quite clear that Dollar bullish investors are in need of inspiration to elevate the Greenback higher with the pending ADP report acting as a catalyst. A positive ADP that exceeds expectations and heightens speculation of further rate hikes this year could pump some life back into the Dollar.
Investors will be paying very close attention to the Fed minutes this evening which could offer some insights on how the Federal Reserve’s plan to unwind its $4.5 trillion balance sheet. Although the “dovish hike” in March exposed the Dollar to downside shocks, any signs of hawks in the pending minutes could offer the Greenback a boost.
