GBP/USD Outlook May 7-11

The British pound had a rare off week, as GBP/USD was down 130 pips, closing the week at 1.6141. The upcoming week is very busy, with ten releases, including Manufacturing Production and PPI Output. Here is an outlook for the upcoming events, and an updated technical analysis for GBP/USD.

The pound lost ground against the dollar, as the Services and Manufacturing PMI readings both were below the markets expectations. As well, HPI data continues to point to a weak housing sector, as consumers continue to be cautious about making major purchases, such as a new house.

Updates: GBP/USD was down, as investors were looking for safe havens after the elections in France and Greece over the weekend. The pair was trading at 1.6164. Monday is a bank holiday in the UK, but two economic releases are scheduled for late Monday, House Price Balance and Shop Price Index. The House Price Balance slumped badly, dropping to a sixth-month low of -19%. The market estimate stood at -10%. The Shop Price Index rose 1.3%, down from the 1.5% increase last month. The pound has edged down, as GBP/USD was trading at 1.6143. BRC Retail Sales Monitor plunged, posting a reading of -3.3%. It was the lowest reading since April 2011. A Government 30-y Bond Auction is scheduled for later on Wednesday. The pound continues to lose ground, as the 1.61 is being tested. GBP/USD was trading close the 1.61 level, at 1.6103. The pound received a boost from a strong Manufacturing Production reading as well as no change in QE. Manufacturing Production reading, posted a 0.9% rise, well above the market estimate of 0.5%. The British Monetary Policy Committee maintained Asset Purchase Facility (QE) at 325B. Some analysts had predicted that QE might increase by 25 billion pounds. GBP/USD responded by climbing above the 1.61 level, and was trading at 1.6145. As expected, the central bank did not adjust to the Official Bank Rate of 0.50%. Industrial Production fell sharply, posting a reading of -0.3%.

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

RICS House Price Balance: Monday, 23:01. This diffusion index has shown substantial improvement since last November. The index is still below zero, posting a reading of -10% in April. No change is forecast for this month.
BRC Retail Sales Monitor: Tuesday, 23:01. This unofficial indicator jumped 1.3% in March. This was the first reading in positive territory since January.
30-y Bond Auction: Wednesday, tentative. The previous 30-y Bond Auction was in March. The reading for that event was 3.43/1.7.
Manufacturing Production: Thursday, 8:30. A key indicator, Manufacturing Production disappointed the markets with a 1.0% drop last month, the poorest performance of 2012. The markets are predicting a much better May, with an estimate of 0.4%.
Asset Purchase Facility: Thursday, 11:00. This indicator has posted the same reading of 325K since February. No change is expected for the May reading.
Official Bank Rate: Thursday, 11:00. The central bank has maintained interest rates at a level of 1.0% for over two years. The markets are not predicting any change in May, so traders should not expect any surprises from this release.
NIESR GDP Estimate: Thursday, 14:00. This unofficial indicator monitors GDP on a monthly basis and should be treated with caution. The indicator is expected to remain at 1.0%, matching the April reading.
PPI: Friday, 8:30. An unexpected reading in this key indicator could change the direction of the pound. After a strong performance in April, the markets are calling for a 0.8% drop in the index. However, the past three readings have all been above the market forecast. Will the release in May follow suit and surprise the markets?
10-y Bond Auction: Tentative. The previous 10-y Bond Auction was in April, and posted a reading of 2.22/1.9.

*All times are GMT

GBP/USD Technical Analysis

GBP/USD opened the week at 1.6279. After rising slightly to 1.6301, the pair slumped, dropping all the way to 1.6141, just crossing the support level of 1.6142 (discussed last week).

Technical levels from top to bottom

We start with resistance at 1.6617, which has held firm since May 2011. Below, there is resistance at 1.6474. After falling below this level last summer, GBP/USD went on a sharp spiral downwards, which lasted until October 2011.

Next, 1.6356, is providing the pair with strong resistance. This is followed by 1.6265, which had been a strong resistance line until last week when it provided weak support to the strengthening pound. It was easily breached by the pair on its downward swing.

The 1.6142 line is now fluid, after providing support for the past two weeks. This is followed by the psychologically important support level of 1.60, which could be tested if the dollar continues to rally. Next, 1.5930, which saw a lot of movement by the pair in April, has been providing strong support for the pair.

Below, there is support at 1.5805, which also was tested in April. The next support level is 1.5750, which has provided support since mid-March. The final line for now is 1.5648, which was last tested in March.

I remain bullish on GBP/USD.

GBP/USD lost some ground to the dollar, but the trend in 2012 has been overwhelmingly in favor of the pound. The British currency has had great success against the dollar, despite much stronger data in the US than in the UK. If releases out of the US are not to the market’s liking, we could see the pound resume its rally after a blip last week.

Kenny Fisher

Kenny Fisher - Senior Writer A native of Toronto, Canada, Kenneth worked for seven years in the marketing and trading departments at Bendix, a foreign exchange company in Toronto. Kenneth is also a lawyer, and has extensive experience as an editor and writer. Kenny's Google Profile

View all posts by Kenny Fisher