GBP/USD Forecast January 19-23 2015

The British pound  showed strong movement in both directions, but GBP/USD closed the week almost unchanged. The pair closed at 1.5150. This week’s major events are Claimant Change and Retail Sales. Here is an outlook on the major events moving the pound and an updated technical analysis for GBP/USD.

Inflation levels continued to drop in December, led by a weak CPI of 0.5%. BOE Governor Mark Carney is hard-pressed to raise inflation, but the weak numbers mean that he has some breathing room regarding a rate hike. In the US,  last week’s data did not impress, as manufacturing and employment numbers disappointed. On the bright side, consumer confidence continued to push higher.

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

1. Rightmove HPI: Monday, 00:01. Housing inflation indicators are useful to track the strength of the UK housing sector. The index has posted two consecutive declines and markets are hoping for a turnaround in the January reading.
2. Average Earnings Index: Wednesday, 9:30.  This is the first major event of the week. The indicator has been on an impressive upswing, improving in each of the past three months. The indicator posted a strong gain of 1.4% in October and the trend is expected to continue in the November reading, with an estimate of 1.7%.
3. Claimant Count Change: Wednesday, 9:30. This is one of the most important indicators, and should be treated as a market-mover by traders. The indicator continues to post strong declines, as the UK labor market continues to improve. In November, the indicator dropped by 26.9 thousand, easily beating the estimate of -19.8 thousand. Another strong reading is expected, with a December forecast of -24.2 thousand. The markets are expecting the unemployment rate to fall from 6.0% to 5.9%.
4. MPC Official Bank Rate Votes: Wednesday, 9:30.   The previous vote was 7-2, with 2 members favoring a hike in rates while the majority was in favor of maintaining  interest rates at 0.50%.  The markets are anticipating another 7-2 vote and a different result could affect the movement of GBP/USD.
5. MPC Asset Purchase Facility Votes: Wednesday, 9:30.  Analysts closely monitor the voting breakdown of the MPC vote on quantitative easing, which is expected to be a unanimous 9-0 decision. A non-unanimous vote indicates some dissension by policymakers as to the desirable QE level.
6. Public Sector Net Borrowing: Thursday, 9:30.  The deficit ballooned to 13.4 billion pounds in November, the largest deficit in 12 months. Still, this was below the estimate of 9.2 billion pounds. The markets are expecting better news in December, with a forecast of 9.2 billion pounds.
7. CBI Industrial Order Expectations: Thursday, 11:00.  The indicator is based on a survey of retailers and wholesalers. The indicator improved to 5 points in the previous release, a 4-month high. The estimate for the December release stands at 6 points.
8. Retail Sales: Friday, 9:30.  Retail Sales is the primary gauge of consumer spending, which is a key engine of economic growth. The indicator surprised with a strong gain of 1.6% in November, easily beating the estimate of 0.3%. It marked the second strongest reading in 2014. The markets are bracing for a sharp downturn in December, with an estimate of -0.6%. Will the indicator repeat and beat the estimate?

* All times are GMT

GBP/USD Technical Analysis

GBP/USD opened the week at 1.5183  and dropped to a low of 1.5073. The pair then reversed directions and climbed to a high of 1.5272, as resistance held firm at 1.5292 (discussed last week). GBP/USD then retracted and closed the week at 1.5150.

Live chart of GBP/USD:

Technical lines from top to bottom

We begin with resistance at 1.5746. It was an important support level in January 2013. The next resistance line is 1.5625.

1.5539 is a strong resistance line.

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

1.5290 held firm as the pair showed strength late in the week.

1.5114 is providing weak support. This line had held firm since March 2013, but was tested during the week. It could see more action early in the week.

1.5008 is protecting the psychologically important 1.50 level.

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

I am neutral on GBP/USD.

The pound has been difficult to pin down, as it showed strong movement in both directions last week. Employment numbers have been strong, but PMI data is pointing to a possible slowdown. US numbers have had some trouble, but with the BOE less likely to raise rates in 2015, divergence could prove to be the dollar’s trump card against the pound.

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