GBP/USD Forecast Feb. 16-20

The British pound  posted its third straight weekly gain, as GBP/USD  gained about 150 points  last week.  The pair  closed at 1.5383. This week’s highlights are CPI and Claimant Count Change. Here is an outlook on the major events moving the pound and an updated technical analysis for GBP/USD.

The pound  posted strong gains on the BOE inflation report, which said that inflation levels would improve and wages were starting to pick up. It was a rough week for key US numbers. Jobless claims jumped above the 300 thousand level and retail sales and consumer confidence softened.

GBP/USD graph with support and resistance lines on it. Click to enlarge:

1. Rightmove HPI: Monday, 00:01. The indicator helps measure the amount of activity in the UK housing sector. The index bounced back in January with a strong gain of 1.4% after two straight declines.
2. CPI: Tuesday, 9:30.  This is  the first  key event of the week. CPI is the primary gauge of consumer inflation and  can  have a major  effect on the movement of  GBP/USD. The index  slipped to just 0.5% in  December and the downturn  is expected to continue, with a forecast of 0.3% for January.
3. PPI Input: Tuesday, 9:30. This index, which measures manufacturing inflation, continues to post declines. In December, the indicator posted a strong drop of 2.4%, within expectations. The markets are expecting another poor release in January, with the estimate standing at -2.1%.
4. RPI: Tuesday, 9:30.  RPI is similar to CPI, but includes housing prices.  Like CPI, the index continues to fall and slipped to 1.6%  in  December, within expectations. The forecast for the  January reading is 1.2%.
5. Average Earnings Index: Wednesday, 9:30. This indicator is an important gauge of consumer inflation. In December, the indicator posted a gain of 1.7%, matching the forecast. No change is expected in the upcoming release.
6. Claimant Count Change: Wednesday, 9:30. Claimant Count Change continues to post strong declines. The December report of -29.7 thousand easily beat the forecast of -24.2 thousand. Little change is expected in the upcoming reading. The UK unemployment rate slipped to 5.8% in December, below the estimate of 5.9%. No change is expected in the January reading.
7. MPC Official Bank Rate Votes: Wednesday, 9:30. In recent votes, two policymakers had voted in favor of an interest rate, but in the January vote, all policymakers voted against any change to rates. The markets are expecting that the February rate vote was unanimous.
8. MPC  Asset Purchase Facility  Votes: Wednesday, 9:30. Asset Purchase Facility remains at 375 billion pounds, and the votes have been unanimous since June 2013. No change is expected in the upcoming release.
9. CBI Industrial  Order Expectations:  Thursday, 11:00. The indicator dropped from 5 to 4 points in January, shy of the estimate of 6 points. The markets are expecting an upturn in February, with the  estimate standing at 7 points.
10. Retail Sales: Friday, 9:30. Retail Sales slipped to 0.4% in December  but this beat the estimate of -0.6%. The markets are braced for a decline of 0.1% in the January report.
11. Public  Sector Net Borrowing: Friday, 9:30. The UK has posted strong deficits in the past two readings.  In December, the deficit of GBP 12.5 billion was well ahead of the estimate of -9.2 billion. The markets are expecting a surplus in January, with a forecast of -9.5 billion pounds.

* All times are GMT

GBP/USD Technical Analysis

GBP/USD opened the week at 1.5239  and dropped to a low of  1.5196. The pair then rebounded sharply, climbing to a high of 1.5422, as it tested support at 1.5416 (discussed last week). GBP/USD closed the week at 1.5383.

Live chart of GBP/USD:

Technical lines from top to bottom

We start with resistance at 1.5625, which  has held firm since late December.

1.5539 is the next resistance line.

1.5416 was tested last week.  This line provided  important support in June 2013, at which time the pound broke through and continued to slide and fell below the 1.49 line.

1.5290 has switched to support as the pound posted strong gains last week.

1.5114 is a strong support level.

1.5008 is protecting the symbolic 1.50 level.

1.4813 is the final support line for now. It marked the start of a pound rally in July 2013 that saw GBP/USD climb above 1.61.

I am  bearish on GBP/USD.

UK inflation levels are low and could go lower this week, so the pound’s rally could be short-lived. As well,  if UK Retail  Sales and other key numbers have a poor week,  the  dollar could make up some  ground.  The markets will be keeping an eye on the FOMC minutes, and  any hints about a rate hike later in the year would likely boost  the greenback.

Expectations for a rate hike in the UK are muted, as inflation remains on a downward trend.

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