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During the US trading session, the British pound fell below 1.75 against the US dollar. The currency has become much oversold and even though a relief rally is imminent, the currency still has room to fall. Like the EUR/USD the GBP/USD does not become fairly valued until 1.65.Of course, purchasing power parity has mattered little to the Euro or the British pound over the past few years when both currencies have seen impressive rallies against the US dollar, but at this juncture, it provides us with reference for fundamental support. Technically, 1.75 is decent support, but below that level, more meaningful support comes in at 1.70.
Outlook for the UK economy
The outlook for the UK economy has not changed. The country is still at risk of falling into a recession and the weaker than expected producer price report gives the Bank of England more breathing room to consider cutting interest rates. On Friday, we said that the market is currently pricing in 75bp of easing over the next 12 months. BRC retail sales and the RICS house price balance are due for release tonight while the industrial production report is slated to be released tomorrow morning. Weaker numbers could trigger a more meaningful break of 1.75.
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