Global macro overview for 17/07/2017

Global macro overview for 17/07/2017:

The UK Business Confidence is at the lowest level in six years. In a report published on Monday, IHS Markit chief economist Chris Williamson noted: "Companies have become increasingly worried about the business outlook, largely as a result of heightened political uncertainties and the potential impact of Brexit". He added: "Business optimism about future prospects has sunk to its lowest for nearly six years, adding to a growing body of data which points to a slowing economy". A fragile business sentiment which is related to Brexit negotiations anxiety, growing domestic political uncertainty and deteriorating consumer budgets have caused UK business confidence to drop to its lowest point in years. This drop in confidence made a pressure on UK optimism and pushed it below the current levels in the Eurozone, especially Germany. Moreover, the level of the UK optimism is in a clear contrast with multi-year high levels of optimism in the United States and Japan, so the UK economy is in risk to fall behind the overall good-looking global economic outlook.

The recent economic data supports a bleak view of the UK economy. The number of firms expecting to increase in the business activity has deteriorated to only 35% in June from 54% in February which is the lowest reading since October 2011. According to EY Item Club think tank, the UK GDP growth forecast was revised down from 1.8% to 1.5% and it is susceptible for further revisions. And last, but not least, the inflationary squeeze on consumers is getting more painful, so the UK consumer spending, the biggest contributor to the GDP, is now facing a strong headwind as it continues to lose the momentum. Inflation is expected to reach up to 3.3% this autumn – well ahead of the growth in average earnings.

In conclusion, the outlook for the UK economy is getting darker and darker, so it will rather sooner than later make an impact on the British Pound exchange rate. The depreciation of the Pound after the last year's Brexit vote is clear and despite the recent corrective moves, triggered mostly by the Bank of England interest rate hike expectations, the longer-term outlook remains bearish.

Let's now take a look at the GBP/USD technical picture on the H4 time frame. After the recent breakout above the technical resistance zone at the level of 1.3029 - 1.3057 the market is now reversing from the local high at the level of 1.3113 in order to test the support zone. The market conditions are overbought, but the negative divergence has been noted yet.

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