UK markit services PMI preview: Deviation impact on the Sterling
Today's UK markit services PMI carries a significantly higher expectation if compared to its prior reading, with consensus currently calling for 50.00 in August vs 47.4 in July. This will be the first month in which the effects of Brexit will be fully factored into the data being released.
UK manufacturing sector holding exceptionally well post Brexit
It is worth noting that the indicator is a leading measurement of the British economic health, as the service indstry has the tendency to adapt to changing conditions relatively quick. Recent manufacturing activity data post Brexit has been, against all odds, beating expectations by a fair margin, suggesting that if the pattern were to coninue its course, the risk appears to be skewed for further upside potential in the Sterling post data.
Buying cheap Sterling ahead of UK services PMI an interesting proposition
In terms of sentiment, since the data is perceived to come relatiively strong, should the Sterling be trading at discounted prices against its main peers ahead of the event, market participants may show a genuine interest to engage in speculative buys. In case the Sterling trades at relatively high levels for the day, that pricing advantage will no longer be available, resulting in no edge, with liquidity drying up on the lead up to the economic data release. Note, insider can also try to front-run prices ahead of the event. If one notices a suspecious spike minutes ahead of the data release, it may commnicate the data may have been leaked. If that's the case, the potential movement post event, if actual data confirms the spike move, may be limited.
Deviation impact on GBP/USD
Readers can find FX Street's propietary deviation impact map of the event below. On closer examination, one will notice that the potential moves tend to be limited between 25 and 35 pips in deviations up to 1.5 to -1.5, although in some cases, if notable enough, a deviation can fuel movements of up to 50 pips. Should additional events at the same time or policy-related headlines hit the wires close to the event (briefly before or after), our map shows that in some occassions, the 15m true range has overstretched past the 60 pips in some instances, although that is quite seldom based on historical data gathered.
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The data in the chart can provide some very useful information for those short term fundamental traders/scalpers aiming to profit from the early econimic data-induced moves. How it tends to unfold is as follows. The Sterling will initially spike in one particular direction, assuming a deviation is observed (if no deviation, there is probably no trading opportunity). During the first spike, algo-led activity on poor liquidity plays a key role, with the swings that follow, up to the close of the fist 5m candle, seeing a gradual increase in volume as macro /scalpers/intraday order flow traders express their views. At times, should a significant deviation be observed, opportunities in mis-pricing are exploited by those well informed traders. For instance, if a 2p positive deviation is seen, should the Sterling show a bid price relatively cheap on an initial corrective swing, based on historical movements, an opportunity to engage in the currency movement may be found. Same apples to play counter-momentum if the price is overextended based on historial movements. It does also provide value to decide levels where profit-taking might make sense.
Additionally, traders with an interest to engage in economic data releases, should bare in mind that if the rate of the Sterling is kept at relatively low levels on the hours leading up to the data release despite GBP sentiment is positive (higher expectations vs last reading), that would make the potential for an extended upside move usually greater, while a disappointment would see the downside, in relatve terms, probably well capped as pre-event moves were more in accordance with a neutral to negative outcome. The same thinking process can be applied should the Sterling be kept at relatively high levels despite negative sentiment expectations. A beat would probably limit the upside as that was being somehow priced in pre-event, while a miss would most likely overstretch the decline.
What price levels have to be considered?
When the above observation can align with key levels for the day, confluent levels can provide genuine value to make trading decisions. With spot trading at 1.3304, we can see next resistance ahead at 1.3311 (Daily High), 1.3348 (Daily Classic R1), 1.3355 (Yesterday's High), 1.3402 (Daily Classic R2) and 1.3412 (Weekly Classic R1). Support below can be found at 1.3300 (Daily Classic PP), 1.3300 (Daily Open), 1.3293 (Monthly High), 1.3293 (Weekly High) and 1.3290 (Daily Low).