Another Weak Manufacturing PMI Report Sets Up Next British Pound Buy

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Includes: FXA, FXB, FXE, FXF, FXY, UUP
by: Duru

Summary

The Markit/CIPS UK Manufacturing PMI fell for the 26th consecutive month.

After early anticipation, traders sold off the British pound in response to the disappointing report.

Bright spots in the domestic economic support a more bullish spin on the numbers and trades on the British pound where uptrends are currently strongest.

Another month and another weak Markit/CIPS UK Manufacturing PMI. The UK Manufacturing PMI came in at 51.4 for June. The PMI fell from the revised 51.9 reading in May and thus logged its 26th consecutive month in decline. The British pound (NYSE:FXB) dropped in response after traders rushed into the currency in anticipation of a better report.

Traders enthusiastically rushed into the British pound ahead of the Manufacturing PMI only to get disappointed

Here is the first paragraph from the report:

"The UK manufacturing sector remained in a softer growth patch in June, as rates of expansion in production and new orders moderated and remained well below those prevailing in the opening quarter of the year. Over the second quarter as a whole, growth of output and new orders was (on average) the weakest since Q1 2013."

The good news is that the manufacturing PMI has remained above 50 (the neutral zone) for 27 straight months. Also, continuing the theme of a strong domestic economy, Markit reported that "…consumer goods output continued to expand at a solid clip…" The eurozone was the usual suspect in dampening manufacturing output. Companies reported "subdued demand" and partially blamed the high exchange rate.

Another bright spot was employment. The growth in manufacturing has supported "broad-based" gains in employment:

"Manufacturing employment increased for the twenty-sixth successive month in June. Although the rate of job creation remained below the average for the current sequence of growth, it accelerated slightly from May's near two-year low."

So while the overall decline in the PMI is certainly a disappointment, the domestic story in the UK remains strong and supports a more optimistic outlook on the UK economy. If/when Europe gets its act together, the UK economy could really take off.

There are interesting currency implications coming from this report. When the British pound slipped after the May Manufacturing PMI report, the British pound sold off to its 50-day moving average against the U.S. dollar and never looked back. A series of strong economic reports followed and helped send the pound soaring. This rally became over-extended as it approached the 1.59 level, and I took the risk of shorting the pound after closing out my long position. As the U.S. dollar extended its post-PMI gains against the British pound into the U.S. trading day, I covered that position. With a freshly clean slate, I am preparing to get back in the more comfortable position of bull on the British pound.

The next charts review the trading opportunities on the British pound. I think trading against the U.S. dollar (NYSEARCA:UUP) is the most difficult trade as the Bank of England and the U.S. Federal Reserve reluctantly "race" for the first rate hike. Both currencies have become extremely sensitive to economic data as the presumed dates approach. This dynamic has produced very choppy trading although the 50-day moving average (DMA) still supports the bullish position on GBP/USD as shown below. This line of support is my preferred starting point for rebuilding a bullish position against the U.S. dollar.

Against the U.S. dollar, the British pound could retest support at the 50-day moving average before resuming a climb

The BEST trades on the British pound have been against the Japanese yen (NYSE:FXY) and the Australian dollar (NYSE:FXA). The charts below show very strong uptrends. I have focused my attention more and more on buying the dips on GBP/JPY and GBP/AUD. GBP/JPY is currently trading right at the bottom of one upward trading channel. Even if this fails, I expect the 50DMA to hold firm. GBP/AUD has been a strong buy-the-dip candidate ever since resistance at "double-parity" broke down, especially on an intraday basis. A break of the 2.02 level might lead to a retest of that line, but for now, the currency pair looks like it is resting up for the next run to a new high.

The British pound has also established a strong uptrend against the Japanese yen

The British pound sliced right through "double parity" on the Australian dollar and is in a strong uptrend against the Aussie

I have not traded the pound against the euro (NYSEARCA:FXE) much. Range traders have probably had a lot of success with this pair since March. Note in the chart below how the 0.70 level held up as clean support. If that DOES break, then the rangebound trading could give way to a new sustained downtrend for EUR/GBP.

The British pound has entered a wide trading range against the euro since March. The 0.70 level held as support during an attempted breakdown in the wake of more Grexit drama

Finally, the British pound is breaking out again against the Swiss franc (NYSE:FXF). I am liking the pound more and more as a way to play bearishness on the Swiss franc. The Swiss National Bank (SNB) was apparently able to stave off panic buying of the franc in the wake of the latest Greek debt drama. So, I was not able to fade the franc at nearly the discount I anticipated. I have already closed out of the position to keep a clean slate for the next big move.

The British pound is on the edge of a breakout against the Swiss franc as it now trades above the 200-day moving average

Source for charts: FreeStockCharts.com

In summary, the (domestic) economic story and the technicals all support a bullish position on the British pound against nearly every major currency. Going forward, I am looking to focus on the currency pairs with the best uptrends in favor of the pound. Currently, those uptrends are best supported against the Japanese yen and the Australian dollar.

Be careful out there!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In forex, I am long and short various currencies mentioned except the British pound and Swiss franc