GBP/USD Outlook January 21-25

The British pound had a week to forget, as GBP/USD shed 150 pips, closing at 1.5864.  There are 10  events in the upcoming week, including Claimant Count Change and GDP. Here is an outlook of the events and an updated technical analysis for GBP/USD.

The pound took a tumble on Friday, as the US dollar was broadly stronger after weak US consumer sentiment numbers. This resulted in a decreased appetite for risk, as investors scurried to the safe-haven US dollar.  

Updates: Rightmove HPI gained a modest 0.2%. This marked an improvement over the last two releases, both of which were in negative territory. Public Sector Net Borrowing looked better, dropping to 13.2 billion pounds. This beat the forecast of 13.4B. The British 10-year Bond Auction posted an average yield of 1.90%. This was slightly higher than the previous average yield of 1.80%. CBI Industrial Order Expectations was a major disappointment, falling to -20 points. The estimate stood at -10 points. The UK will release key employment data and MPC minutes on Wednesday. GBP/USD is steady, as the pair was trading at 1.5862. Claimant Count was outstanding, as new unemployment claims dropped by 12.1 thousand. The estimate stood at 0.4 thousand. The Unemployment Rate dropped a notch to 7.7%. This beat the forecast of 7.8%. The BOE released the minutes of its previous MPC meeting. The MPC voted unanimously, in a 9-0 count, in favor of maintaining interest rates at 0.50%. The vote on QE was 8-1, with one member in favor of increasing asset purchases to 400 billion pounds, from the present 375 billion. Average Earnings Index came in at 1.5%, just below the estimate of 1.6%.   BBA  Mortgage Approvals showed no change, with 33.6 thousand new approvals. This fell below the market forecast of 34.1 thousand. CBI Realized Sales declined by 17 points, but managed to beat the estimate of 14 points. External BOE MPC Member Martin Weale will speak in London on Thursday. The pound continues to slide, as GBP/USD was trading at 1.5812.

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

1. Rightmove HPI: Monday, 00:01. The housing inflation index looked weak in the latter half of 2012.  In the December release, the index declined 3.3%,  the  sharpest drop in over five years. The dismal numbers point  to continued weakness in the UK housing sector.    
2. Public Sector Net Borrowing: Tuesday, 9:30. The Public Sector Deficit ballooned last month, climbing to 15.3 billion pounds. This was its worst performance in six months, and points to ongoing fiscal problems which are   weighing on the UK economy. The markets are expecting significant improvement in the January release.
3. 10-year Bond Auction: Tuesday, Tentative. These bond yields remain low, and have recent releases have been in the 1.80 range. No significant change is expected in the upcoming reading.
4. CBI Industrial Order Expectations: Tuesday, 11:00. The indicator continues to flounder in negative territory, although last month’s reading of -12 points was considerably better than the estimate. The January forecast stands at -10 points.
5. Claimant Count Change: Wednesday, 9:30. This employment indicator is eagerly awaited by the markets, and is one of the most important economic releases. In December, the indicator was outstanding, with a drop of 3.0 thousand unemployment claims. The markets are hoping for another good result in the upcoming reading, with a forecast of a small gain of 0.3 thousand. The Unemployment Rate is expected to remain at 7.8% for the third straight month.
6. MPC Meeting Minutes: Wednesday, 9:30. The Bank of England’s interest rate and QE announcements always attract a lot of attention, and analysts attach great importance to the breakdown of the voting pattern for these two events. The report may also provide hints of what to expect at future votes.
7. BBA Mortgage Approvals: Thursday, 9:30. This release is an important indicator of housing  market demand in the UK. The  indicator has been showing slow but steady improvement since mid-2012, and another slight increase is  forecast in the January release.    
8. CBI Realized Sales: Thursday, 11:00. After a couple of strong readings, this indicator slipped badly in December, dropping to 19 points. The markets are bracing for another slide, with a estimate of 14 points.
9. Preliminary GDP: Friday, 9:30. British GDP, released  quarterly,  measures the value of goods and services produced by the economy, and  any  unexpected reading  can have a major impact on the movement of GBP/USD.  After three weak readings, the Q3 reading was excellent, jumping by 1.0%. This was the best performance since Q2 of 2010. However, the markets are expecting a sharp decline, with an estimate of -0.1% in the upcoming reading.

*All times are GMT

GBP/USD Technical Analysis

GBP/USD opened the week at 1.6123. The pair quickly touched a high of 1.5464, but it was all downhill from there.  GBP/USD dropped all the way  to 1.5855, and closed the week sharply lower, at 1.5864. The support line of 1.5850 (discussed last week) held firm.

Technical lines from top to bottom:

With the pound losing ground, we start at lower levels this week. There is resistance at 1.6475, which last saw activity in late August 2011, when the pound went on a deep  slide.  The next line of resistance is at 1.6343, which  was breached  immediately after the fiscal cliff agreement on New Year’s Day, but has  remained intact since that  time.

Next, there is resistance at 1.6247. This is followed by 1.6122, which has switched for its support role. The pair broke below 1.6060, dipping below the critical 1.60 level. The pair touched the 1.5992 the week before last, and easily broke through  support at this line this week. Next, 1.5930 could not hold on,  as the pair  pushed below the 1.59 line.

GBP/USD is receiving support at 1.5850. This line has  remained intact  since mid-November,  but is now a weak line of support. It could  be tested if the pound continues to lose ground.  This is followed by 1.5750, a strong support line. We next encounter support at 1.5648. Next,  1.5516 has held steady since August of last year.  The final support line for now is 1.5406, which has not been tested since July.

I remain bearish on GBP/USD.

The UK economy has not shown much life of late, and the US recovery continues to be a question mark. Weak US data hurt the pound late last week, and the British currency has now fallen into the mid-1.58 range. With the UK economy struggling  under strict austerity measures, and the US likely facing more fiscal challenges in February, the pound will have a tough time trying to establish any upward momentum.

Further reading:

• For a broad view of all the week’s major events worldwide, read the USD outlook.
• For EUR/USD, check out the Euro to Dollar forecast.
• For the Japanese yen, read the USD/JPY forecast.
• For the Australian dollar (Aussie), check out the AUD to USD forecast.
• For USD/CAD (loonie), check out the Canadian dollar forecast.