GBP USD looks poised for breakout as traders eye NFP

The eagerly-awaited US jobs report will be released shortly, at 13:30 BST. The consensus expectations call for a reading of 225,000, which would still be a decent number given the fact that some of the leading indicators for the employment report have been disappointing, namely the ADP non-farm employment change, which came out at 185,000, and the ISM manufacturing PMI employment sub-index, which fell to 52.7 from 55.5 previously. However the employment subcomponent of the ISM services PMI was very strong (59.6, up from 52.7) and the weekly unemployment claims dropped to a 40-year low in the survey week. Given these mixed-bag indicators, the actual nonfarm employment number could deviate significantly from expectations this time around. Our base case is that we will see a strong number and thus a continuation of the upward trend in the dollar as the market prepares for an earlier rate hike from the Federal Reserve. The growing relevance of inflation means traders should keep a very close eye on the Average Hourly Earnings part of the employment report. Last time, earnings were flat but they are expected to have grown 0.2% in July.

The GBP/USD could be in for a bigger move – especially if the jobs numbers top expectations. That’s because up until yesterday everyone was growing ever so bullish on the pound as they thought the Bank of England would transmit a hawkish signal to the market. But as it turned out the BoE was quite dovish with only one monetary policy member voting to hike rates as opposed to at least two expected. Though the pound did slide quite noticeably yesterday, it may have further room to the downside as more existing longs rush for the exits. But the bigger risk is that we will get a very disappointing set of numbers from the US today, which could lead to a nasty counter-trend move in all USD pairs, including the Cable.

From a technical point of view, the GBP/USD continues to consolidate inside narrowing ranges but the pair now looks poised for a breakout – but in which direction? The key support area is between 1.5465 and 1.5500 – these levels were tested as a result of yesterday’s events (dovish BOE) but ultimately the bears did not have the conviction to hold their ground there (which makes sense as the NFP was due a day later). In other words, the trend of higher lows is still intact. But price may have already formed a lower higher a couple of weeks ago when it ran into strong resistance circa 1.6570. Therefore the key levels to watch going forward are 1.5465 to the downside and 1.5670 to the upside. A decisive break of one of these levels could see price move significantly in the direction of the breakout. But while contained in this range, traders should be nimble and approach the Cable as a ranging rather than trending market.

As our base case is for continued dollar strength, I would like to concentrate on the downside for the Cable. If price does break below the 1.5465 support level then a move down to the prior low of 1.5330 would be highly likely.  Incidentally, this level also ties in with the 161.8% Fibonacci extension level of a small price swing from a couple of weeks ago – see the chart for details. The 127.2% extension of the same swing comes in at 1.5405 which lies about 25 pips ahead of the 200-day average at 1.5380.

The more significant retracement levels of the larger price swing from the April low are at 1.5245 (50%) and 1.5085 (61.8%). These could be among the longer term bearish targets should price break to the downside as we think it might.

Meanwhile on the upside, there is some immediate horizontal resistance seen at 1.5530, followed by the 50-day moving average a 1.5565 and the bearish trend line at 1.5630. Thereafter is the key resistance at 1.5670, a break above which would be a very bullish outcome that could lead to a continuation towards 1.5815 at the very least.