04/02/2015: Cable on the brink but can it sustain a breakout?

So this morning the UK completed a hat-trick of PMI beats. The purchasing manager surveys are a strongly predictive indicator of economic activity in the month ahead and the data compiled for the surveys conducted in January have been encouraging across the board. Cable has rallied strongly since Monday and it is now close to an important breakout. This resistance around $1.5200 has certainly been holding back the bulls. Now in the past few minutes this barrier has been overcome, but this time, can it sustain the breakthrough?

UK

In the UK, the construction industry only accounts for around 6% of the economy, with manufacturing a slightly bigger proportion at just under 20%, whilst the service sector dominates the economy at around 75%.The UK PMI all improved from the previous month and also importantly beat expectations:

  • Manufacturing PMI was 53.0 ahead of the 52.7 expected and up from 52.5 last month
  • Construction PMI was strong at 59.1 ahead of the 557.0 expected and up from 57.6 last month
  • The dominant Services PMI was 57.2 ahead of the 56.3 expected and up  strongly from 55.8 last month

This has helped to drive a sterling recovery in the past few days. As seen in the chart below (compiled by the ONS and Markit), the PMIs have a direct influence on economic growth. The Bank of England will be interested in the readings as monetary policy is discussed tomorrow and more importantly the Quarterly Inflation Report is released next week. Certainly, if this improvement in the PMIs continues it will help to drive the argument of any hawks on the Monetary Policy Committee (such as Martin Weale and Ian MacCafferty). Short Sterling Interest Rate futures are today pricing in a December 2015 rate hike. This is sooner than the Q1 2016 that had been priced in just three weeks ago.

UK economic growth   Q12015

 

As can be seen in the chart below, the resistance around $1.5200 has been holding Cable back for almost 3 weeks. The release of the better than expected Construction PMI drive a rebound from $1.5000 yesterday, whilst the Services PMI today have driven further gains, and in the past few minutes above $1.5200. The moves to $1.5200 have failed in recent weeks, with a failure to achieve consecutive hourly closes above $1.5200 before the bears have resumed control. So the performance in the coming hours will be important as a sustained breakout would re-open the key high at $1.5270.

Cable   04022015

 

If this were to be seen, it would then be increasingly possible that there might be a direct challenge of the resistance of the 6 month downtrend and the consolidation on Cable over the past few weeks could turn into a big base pattern. And then we could start to talk about much bigger upside targets. For now, we must retain some sense of caution but these forward looking PMI readings suggest perhaps a degree of optimism on sterling in the near term. The ISM Non-manufacturing data this afternoon could scupper the rebound still, but for now the outlook on Cable is improving.

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