UK recessionary risk

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By: Andria Pichidi

GBPJPY

Sterling made a return to underperforming ways after much worse than expected manufacturing and construction PMI data, which were followed up by some dovish remarks from BoE Governor Carney late yesterday. Meanwhile today, the June UK services PMI disappointed.

The data fell at 50.2, a 3-month low and dropping from May’s 51.0 reading. The median forecast had been for a more modest decline to 50.6. The indicator signals stagnation, with the sector only expanding fractionally. Sluggish domestic conditions and greater risk aversion due to prolonged Brexit and associated political uncertainty among clients were highlighted by respondents.

The details of the report showed that volumes of new work have fallen again, with this metric now having showed a reduction in five of the last six months. This has contributed to an ongoing decline in unfinished business, which has now fallen by the longest stretch since 2011-12. One positive was a rise in employment, which was driven by the filling of long-term vacancies. The June composite PMI worked out at 49.2, dropping sharply from May’s 50.7, dragged lower by weak construction and manufacturing components. This is the first time since July 2016 that the composite PMI has been below the 50.0 mark.

Overall, the June PMI data paint a picture of an economy in stagnation and at risk of tipping into recession; a consequence of both Brexit-related uncertainty and slowing economic activity in continental Europe.

Cable earlier extended lower, to a 12-day low at 1.2565, while EURGBP inched nearer to 6-month high territory. Another pair that hit 6-month low was GBPJPY,which is currently trading at 135.38. The asset seems that it is driven by a renewed negative bias, as the medium term Bollinger Bands pattern are extending further to the downside once again. the asset is in a bearish channel since the end of January 2018.

Hence as the asset failed the past few days to sustain a movement above 136.00 area, and as the downside momentum look to grow again, the next levels to be watched are 133.80 (latest weekly fractal), 132.30 (127.2 FIb. Extension from since  2018 decline and also December’s low) and 129.00 (2016’s Support). Immediate Resistance is set at 138.30 (5-week peak), 139.00 (50-day EMA) and 139.88 (6-month Support during 2018).

Momentum indicators are supporting the negative outlook in the near term but medium term as well, as  MACD lines are moving southwards under neutral, while RSI slipped lower again and currently retesting 30 barrier with further space to be covered to the downside.

Nevertheless, the UK currency has been trading with a 10-15% trade-weighted Brexit discount since the vote to leave the EU in June 2016, and we cannot still see much scope for this to reverse anytime soon. As for Brexit, the news flow has remains quiet in terms of substantive developments. That will change as soon as the new prime minister, most likely no-deal-Brexit-if-necessary Boris Johnson, takes up the reigns (which should be by mid month).


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