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The pound reached a one-week high against the U.S dollar on Thursday after a report from the Markit Institute showed that the manufacturing sector in Britain recovered from a post-Brexit slump. The U.K economy is appearing to be more resilient than what had been anticipated after the U.K. voted to leave the European Union in June.
The Sterling surged more than 100 pips to $1.32657 following the news that the U.K Purchasing Managers Index jumped considerably in August to a level of 53.3, swinging back into expansion territory. After tumbling to a three-year low of 48.3 in July, the PMI carved out significant gains to reach a 10-month high in August, easily knocking down economists’ forecasts.
Although manufacturing only accounts for about 10% of Britain’s economy, the sharp rebound reported today could nudge the Bank of England to reconsider the need to cut rates further. The BOE has forecast no growth in the economy for the second half of 2016 as a result of the Brexit vote. Further, it has indicated readiness to employ more stimulus measures including further slashing record-low interest rates even further.
To obtain a full picture of the near-term impact of the Brexit vote on the whole economy, the markets will need to wait for the release of the services PMI, which is due on Monday. If the index for the service sector (which covers more than half of the UK economy) confirms that the economy is performing better than initially expected, a rate cut by the BOE in November may no longer be expected/needed. The Pound, in turn, will benefit from such a development.
In the U.S, data published today was in line with forecasts and exerted almost no impact on the dollar. Investors are paying a lot of attention to the NFP report out tomorrow. The report is being considered a key factor in helping the market assess the possibility of a rate increase at the Fed’s late-September meeting.
Fig: GBPUSD H4 Technical Chart
GBPUSD has successfully breached the descending trend line after the sharp up move which took it back to near the recent highs around the 1.32620 level. The pair failed to climb higher from this level last week and is attempting to test the major threshold at 1.33000. The RSI has surged higher and is nearing overbought levels. Although the ADX index is pointing up, the +DI line is heading down, showing a weakening bull. We expect to see a period of consolidation before the pair can fly higher.
Buy Digital Call option from 1.32700 to 1.33000 valid until 21:00 GMT September 01, 2016