GBP/USD rallies as dollar slumps

The dollar has fallen across the board today. After Friday’s disappointing U.S. jobs report, today saw factory orders come in at -3.3% month-over-month for July. Although expected, this was yet another piece of economic data pointing to weakness in the U.S. economy, which could deteriorate further due to the economic damage Hurricane Harvey has caused.

As a result, interest rates in the United States may remain low for longer, with the next rise now unlikely until next year. Indeed, the Federal Reserve’s Lael Brainard has warned that the central bank should be cautious about lifting short-term interest rates further. Brainard, like many other Fed officials, wants to be confident that inflation is on track to reach the target. Not only that, but she has also said that even a temporary move above the inflation target should be tolerated given the multi-year spell of below-target readings in the past. FOMC members Kashkari and Kaplan will be speaking later on today.

But with the Dollar Index hovering near its 2.5-year low hit last week, one can argue that much of the negativity might be priced in for the dollar. Consequently, the greenback could be on the verge of a possible a recovery. However, so far we haven’t had anything to trigger that potential rally, with Fed officials sounding dovish and data showing weakness in the economy. So it is a case of “guilty until proven innocent” when it comes to the dollar. 

Several dollar crosses look like they have the momentum to go further, not least the British pound/U.S. dollar (GBP/USD) currency pair. This pair bounced nicely off of key support and 38.2% Fibonacci retracement level (1.2775) against this year’s low (1.1990), on Aug. 24. Since then, it has formed a couple of higher lows. Highlighting GBP’s strength, the cable has risen today despite weakness in UK data as services sector PMI disappointed expectations earlier. With key short-term resistance area between 1.2965-1.2995 broken, a potential re-test of this region could provide support leading to another push higher. The next bullish objective is at 1.3075, which corresponds with the 61.8% Fibonacci level against the most recent drop. Another target is at 1.3190/5, which was the last support pre-breakdown.

Meanwhile, all bets would be off if today’s low at 1.2910 breaks in the coming days. In this potential scenario, we could see a sharp move lower as the longs rush for the exits.