GBP/USD Outlook January 2-6

GBP/USD surpised the markets with some unexpected movement  during the holiday week. The pair broke the 1.57 resistance line (discussed last week), then dipped sharply to 1.5361, before recovering to close  the week  at 1.5527.  There are  five releases in the upcoming week, as the  markets are   back in action. Here is an outlook for the upcoming events, and an updated technical analysis for GBP/USD.

The UK economy grew by 0.6% in Q3, which was surprisingly good news. Other indicators point to a more troubling picture for 2012, such as the current deficit, which has ballooned to 15.2 billion pounds.     Recently, the British pound managed to distance itself from the debt crisis affecting Europe. The movements in GBP/USD were still correlated with those made by EUR/USD, but the euro lost much more ground against the dollar. This has resulted in a big drop in EUR/GBP that reached levels seen only at the beginning of the year.

Updates: The improvement in British manufacturing PMI helped the pound gain some ground as traders returned. See how to trade the construction PMI. Also construction PMI exceeded expectations and climbed to 53.2 points. On the other hand, worries from Europe sent the pair down under 1.56. Also the services sector exceeded expectations, but this wasn’t enough to boost the pound, hurt by core European problems.

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

1. Manufacturing PMI:  Tuesday, 9:30.  This index is based on a survey of about 600 purchasing managers in the manufacturing industry. The market’s forecasts are usually reliable and close to the actual  figures released.  The December release came in at 47.1, very close  to market prediction of 47.6.    The prediction for the Janaury reading stands virtually unchanged, at 47.4.
2. Construction PMI: Wednesday, 9:30. Construction PMI surveys purchasing managers in the construction industry for their views on the economy.The market forecasts are usually accurate, and this was again the case in December, with an actual figure of 52.3,  practically identical to the forecast of 52.1.  Little change is expected  for this month’s reading, with a forecast of 51.9.
3. Net Lending to Individuals: Wednesday, 9:30. This indicator  focuses on consumer credit, which is an important component of consumer  spending.  December’s reading was up to 1.3B, well above the market prediction of 1.0B.   The market prediction is again 1.0B for the January reading. Will the indicator again surpise the markets with a better than expected reading?
4. Halifax HPI: Thursday, 5th to 12th. The HPI (Housing Price Index) is an important housing sector indicator, which measures inflation in the UK housing  market. The index tends to be volatile, and dropped to -0.9% in December after a reading in November of 1.2%.
5. Services PMI: Thursday, 9:30. This index is based on a survey of purchase managers in the service industry. For almost all of 2011, the index stayed above 50, indicating expansion in the services sector. For this month, the market is predicting another reading just above the 50 level, at 51.6.

* All times are GMT.

GBP/USD Technical Analysis

Pound/dollar started  the week at 1.5593. It then broke the 1.57 line (discussed last week),  touching 1.5704.  The  pound then lost ground,  dropping  sharply to 1.5361, before  recovering on the final trading day of the year to close at 1.5527.

Technical levels from top to bottom

We  begin  with  the resistance level  at the round number of  1.61. Next,  1.6045  proved to be a  weak resistance level in November, but it has not been tested since then. Below, is the level of 1.59, which provided strong support in November, and is now acting as a resistance line.  1.5815 has proven to be a  strong line of resistance since mid-November.

The round number of 1.57  is providing weak resistance,  and  was  breached several times in  December. The next line is 1.5580, which is also a  weak support  level.  This is followed by 1.5475, which  is  providing strong  support.  Next, the line of 1.5415 is providing weak support, and was breached by the pair twice in  the final trading week of the year.  Below, are the levels of 1.5340 and 1.5270.  The final support level for now is 1.5120.

I remain bearish on GBP/USD.

Economic indicators in the UK remain sluggish,  and the economy is  likely headed for a recession in 2012. If the economy in the US continues to improve, the dollar may make significant gains at the expense of the pound.

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.
• For the Swiss Franc, see the  USD/CHF forecast.