UK business activity rose to its fastest levels in five months and scored a new nine month high. The February reading for Services PMI printed at 51.8, well above the forecast of 51.1 and the prior month’s reading of 51.5. The strong print helped the pound rally to 1.52 against the U.S. dollar but then was quickly visited by strong sellers.
DOWNGRADE IMPACT
Since the first ever credit-rating downgrade by Moody’s on February 22, sterling/dollar (GBPUSD) has stabilized around the psychological 1.50 level–perhaps, the accumulation phase by value investors. The credit markets were expecting a downgrade and the timing (30 minutes left in the trading week) of the announcement occurred during a very thin market. The reaction was nowhere as serious as the one the U.S. dollar suffered when the U.S. was downgraded by S&P.
CENTRAL BANK DRAMA
Weakness may have been greater if we did not know that BOE governor Mervyn King was on his way out and the hawkish Mark Carney was coming from Canada to save England. The other key British official is George Osborne, the Chancellor of the Exchequer. Mr. Osborne’s goal to balance the budget may fail if we need to see more stimulus and tax cuts to stimulate the economy. The politics remained mixed and it is not a certainty that we will get more QE this week.
FALLEN TO MAJOR SUPPORT
In the short-term, we may continue to see a strong rebound help squeeze out late shorts to the party. The strong bearish trend has hit a major support target with the 1.50 level and has currently rebounded over the 1.5150 level.
If we see a significant push higher, the 1.5300 level, which is the 23.6% retracement of the 2013 high to low move, will provide key resistance. To the upside, further resistance will lie at 1.5500 and 1.5664. If the rebound stalls, key support will remain at the 1.5075. A breakdown below this area could trigger a return to extreme downside.
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