GBP/USD Outlook Feb. 6-10 2012

The British pound  rally against the dollar slowed this week, with the  pound  gaining slightly  against the greenback, closing the week at the 1.58 level.  The upcoming week has seven releases.  Here is an outlook for the upcoming events, and an updated technical analysis for GBP/USD.

The Purchasing Managers’ indices in the UK were generally better than expected in  January, and an  official recession now seems less likely. However, another round of QE by the contral bank seems inevitable. Despite stronger US growth, the pound has had a spectacular run, rising over 500 pips against the dollar since mid-January.

Updates: The Halifax HPI rose by 0.6%, better than expected. Nevertheless, the Greek standoff sent the pound down to around 1.5750. BRC showed a slide in retail sales, 0.3%. Nevertheless, the pound managed to tick up on European stability and trade around 1.58. Cable enjoyed Bernanke’s softness and Greek progress to cross 1.59, before retreating a bit. See how to trade the British manufacturing output with GBP/USD. As expected, the MPC expanded the Asset Purchase Facility by 50 billion to 325 billion. This was greeted with a small relief, as some had expected +75 billion. Greek troubles kept the pair depressed under 1.5850.

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

1. Halifax HPI:  Monday, 8:00.   The HPI (Housing Price Index) is an important housing sector indicator, which measures inflation in the UK housing  market. The index has recorded a contraction of -0.9% in its last two readings, a sign of sluggish activity in the housing sector. The forecast for February is for a slight increase of 0.1%.
2. BRC Retail Sales Monitor:  Tuesday, 00:01.  The indicator  was a bright spot in the economy last month,  recording an increase of 2.2%.    This was the indicator’s best reading since May 2011.  Will the upswing  continue in February?
3. BRC Shop Price Index:  Wednesday, 00:01. The Shop Price index provides a snapshot of consumer inflation, although it is fairly narrow in scope. The index has dropped three consecutive months, and now stands at 1.7%.
4. Manufacturing Production:  Thursday, 9:30. This index  has been on the rise, although it is still showing contraction in the manufacturing sector. The forecast for  February calls for an increase of 0.3%. A rise  into positive territory  would be welcome news for the hard-pressed industry.
5. Trade Balance:  Thursday, 9:30. The Trade Balance indicator  is important to traders, since an increase in UK exports means more foreigners are purchasing British pounds. Trade balance figures are deep in negative territory, although last month’s readings were  within the market’s expectations.  Little change is expected this month.
6. NIESR GDP Estimate: Thursday, 3:00. This  indicator,  published monthly,  is used by analysts  to try and predict actual GDP figures, which are released on a quarterly basis. The indicator has been dropping since November, with the last reading showing a negligible increase of 0.1%.
7. PPI Input: Friday, 9:30. This index is an important measure of consumer inflation, and has added importance for analysts because it is released ahead of CPI. The index contracted by 0.6% last month, and the markets are predicting a stronger reading in February, calling for an increase of 0.4%.

* All times are GMT.

GBP/USD Technical Analysis

Pound/dollar started  the week at 1.5722.  The pair climbed as high as 1.5882, but did not break the resistance level  at 1.59 (discussed last week). It then  retracted to a low of 1.5654.  GBP/USD closed at 1.5798, for a slight gain for the week.

Technical levels from top to bottom

We  begin  with  the strong resistance level of 1.6472, which has not been tested since August 2011. The next line of resistance is at 1.6426. This is followed by resistance at 1.6265. Next, 1.6132 has provided strong resistance since November. Below, there is resistance at 1.6065, followed by strong resistance at the psychologically important figure of 1.60. The line of 1.59 acted as a support line back in October 2011, but is now in a resistance role. It could be tested on any upswing by the pair. Below, 1.5758 is providing weak support for the pair.  The round number of 1.57, which just last week was a resistance line, was breached and   now finds itself providing weak support.

The round number of 1.55 is strengthening in support as the pair continues to move upwards.  Next, 1.5469 has been a weak line for much of January, and is currently in a support role. The round number  of 1.54, which served as strong support in November and December of 2011,  is again  providing support to the pair.  Below, 1.5360 is a weak support level, as is the line of  1.5279.  Next, the round number of 1.52 is a major support level,  followed by strong support  at 1.5120.

I remain  neutral on GBP/USD.

GBP/USD continues to move upward,  even though  economic fundamentals clearly favor the US over the UK.  A  correction to the pair seems overdue, but traders may still stick with the pound, following the adage “the trend is your friend”.

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 the New Zealand dollar (kiwi), read the  NZD forecast.
• For USD/CAD (loonie), check out the  Canadian dollar  forecast.
• For the Swiss Franc, see the  USD/CHF forecast.