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Pound Gets Bad News – Loses Support

With disappointing employment figures and a lower growth forecast, GBP/USD loses another support line. Risk aversive trading adds to the move. Update on the Pound.

Claimant Count Change, the first and most important employment figure in Britain showed a drop of only 3800 unemployed people in July, much less than 17,00 that was expected. This was the headline, and the bad news continued:

Also last month’s number was revised, and not in a good way – a drop of only 15,900 unemployed people, less than 20,800 that was initially reported.  The unemployment rate for June remained at 7.8%, as expected.

A short time after this disappointment, Mervyn King presented the inflation report. The governor of the BoE returned to his regular stand on inflation – that it will eventually return to the government’s 2% target and even lower in 2012 – only 1.5%.

This came after King already expressed concern about inflation a few weeks ago. The annual rate of inflation now stands on 3.2%. King said it will remain higher in 2010 to higher taxes, and not anything substantial.

King and his colleagues not only dismissed inflation, but also lowered the growth forecasts for 2010 – yet another blow to the Pound. Instead of 3.6%, the official forecasts now stand on 3%.

GBP/USD tumbles down

The British Pound traded at around 1.5810 before these news came out. This was lower than the highs it reached last week, and also below the 1.5833 resistance line, but well above the bottom of 1.5710 it reached before the Fed decision.

The news sent it under 140 down to 1.5670 in a sharp move. GBP/USD currently stabilized at 1.5680. It now stands above a minor support line at 1.5660 which temporarily capped the pair last week. More significant resistance appears at 1.5520, which was a very tough resistance line in the past, and now works as support.

A recovery of the Pound will sent it tackle the 1.5720, 1.5833 and the 1.60 lines.

But there’s another force that hurts the Pound – risk aversion. The initial reaction to the Fed’s move was a weaker dollar, as Bernanke made a move to print dollars. But as the hours go by, the market digests the move and fears a global slowdown.

A global slowdown brings back risk aversive trading – a feature that was absent from the markets in the past two months. As the whole world is weak, the “safe haven” currencies – dollar and yen, rise, while “risky currencies” such as the Euro, Pound, Aussie and Kiwi, lose ground.

Will the Pound recover?

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Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.