GBP/USD Outlook January 14-18

GBP/USD  was again  marked by  volatility this week, showing strong movement in both directions. The pair gained about 50 pips on the week, closing at 1.6124. This week’s major releases include CPI and Retail Sales. Here is an outlook of the events and an updated technical analysis for GBP/USD.

Late last week,  the ECB  held interest rates at 0.75%. The US dollar was broadly weaker on the news, and the pound took full advantage, as it posted sharp gains. However, the pound gave back some of those gains following weak data from UK Manufacturing Production.

Updates: RICS House Price Balance climbed out of negative territory in over two years, fuelling hopes that the UK housing sector is showing improvement. The indicator came in at 0%, surprising the markets, which had expected a decline of 8%. The UK released a host of inflation data on Tuesday. CPI, the most important inflation index, posted a 2.7% gain. This matched the estimate and was the third straight reading with this figure. PPI Input declined 0.2%. The estimate stood at 0.0%. RPI came in at 3.1%, a notch higher than the forecast of 3.0%. Core CPI dropped to 2.4%, lower than the estimate of 2.6%. HPI came in at 2.1%, well above the estimate of 1.7%. PPI Output showed little change dropping by 0.1%. This was just shy of the estimate of 0.0%. BOE Governor Mervyn King testified before Parliament’s Treasury Select Committee in London. CB Leading Index bounced back into positive territory, posting a 0.2% gain. The pound has lost ground, as GBP/USD was trading at 1.6049. There are no UK releases until Friday. The pound has had a week to forget, and continues to  put pressure on  the critical 1.60 level. GBP/USD was trading at 1.6033.

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

1. RICS House Price Balance: Tuesday, 00:01. This index is an important indicator of housing inflation index in the UK.  Recent figures have looked sluggish, with  the index posting a decline of -9% in December.  This is an indication of ongoing weakness in the housing sector. The markets are expecting a similar reading in  January.  
2. CPI: Tuesday, 9:30.  CPI is one of the most important releases, and  any unexpected reading can impact on  GBP/USD. Inflation  has been fairly robust, with CPI rising by 2.7% in each of the past two readings. The markets are expecting an identical rise in the upcoming release.
3. PPI Input: Tuesday, 9:30. Another indicator of consumer inflation,  PPI Input has been quite low in recent readings, gaining a paltry 0.1% in  December.  Little change is expected in  the January release, with  the estimate standing at 0.0%.  
4. RPI: Tuesday, 9:30. RPI includes housing costs, which are excluded in CPI. This inflation indicator jumped to 3.2% in December,  but the markets are expecting a slight drop in the upcoming reading.
5. CB Leading Index: Tuesday, 10:00. This third-tier release is composed of 7  economic indicators. After posting a string of modest gains, the index declined by 0.4% in December. Will the index bounce back into positive territory this month?
6. Retail Sales: Friday, 9:30.  Retail Sales  is one of the most important indicators of consumer spending, and is eagerly anticipated by the markets. Retail Sales have looked weak of late, and came in at a flat 0.0% in December. The markets are expecting a slight improvement in the January reading.

*All times are GMT

GBP/USD Technical Analysis

GBP/USD opened the week at 1.6067. The pair then  briefly broke below  the 1.60 level,  touching  the support line of 1.5992 (discussed last week).    GBP/USD bounced back, touching a high of 1.6177. The  pair  closed the week at 1.6124.

Technical lines from top to bottom:

We  start at 1.6721, a resistance line which has not been tested since May. This is followed by resistance  at 1.6618. Below, is the line of 1.6475. This line has held firm since August 2011. This is followed by resistance at 1.6343, which saw  activity immediately after the fiscal cliff agreement.  Next, there is resistance at 1.6247.

GBP/USD continues to receive support  at 1.6122. This  held firm  was briefly broken as the pair lost ground early in the week. However, the  pair recovered, and this  support line remains intact, although it is weak. Look for this  line to continue to see more activity.  1.6060 is the next line of support, protecting the critical 1.60 level. This is followed by 1.5992. This line has  held firm  since the end of November, but the pair did touch it this past week.  

We next encounter support at 1.5930. Next, there is strong support at 1.5850. This line has been solid since mid-November, when the pound began its rally against the greenback. This is followed by 1.5750, a strong support line which has not been tested since August. Next, there is support at 1.5648. The final support line for now is 1.5573.

I am  bearish on GBP/USD.

The pair continues to display volatility in January, with the pound making some gains this week in thanks to the ECB rate decision. The  gains were the result  of broad dollar weakness rather than any positive news out of the UK. The British currency will have trouble sustaining any upward momentum if UK releases continue to be weak, such as Friday’s manufacturing data.

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.