GBP/USD Outlook January 23-27

GBP/USD was up sharply this week, as the pound gained almost 250 pips, settling in the mid-1.55 range. The upcoming week has six releases including GDP. Here is an outlook for the upcoming events, and an updated technical analysis for GBP/USD.

Unemployment in the UK remains high at 8.4%, making an economic recovery difficult. With a drop in inflation reported last week, the likelihood of the Bank of England expanding its QE program in the upcoming meeting in February are on the rise.

Updates: British government borrowing stood on 10.8 billion in December, lower than estimated. Together with the optimism from Europe, the pound was able to make nice gains and reach 1.56 before sliding. See how to trade the first release of British GDP with GBP/USD. The British economy contracted in Q4, by 0.2%. Together with higher unemployment and lower inflation, the chances are higher for more QE in Britain. The pound took a dive, but managed to recover. British CBI Realized Sales disappointed by plunging to -22 points, much worse than expected. Nevertheless, the pound still enjoys the Bernanke’s move: he extended the pledge for low rates until late 2014 and this sent the dollar way down. GBP/USD is struggling on high ground at 1.57.

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

Public Sector Net Borrowing: Tuesday, 9:30. The indicator rattled the markets in December, as it ballooned to a figure of 15.2B, its highest level since June. The markets are forecasting some improvement in January, with a figure of 12.7B.
BOE Gov King Speaks: Tuesday, 20:00. Volatility in the markets is not uncommon following a speech by the head of the central bank. Analysts and traders scrutizine the Governor’s remarks for any hint as to future monetary policy and interest rate decisions.
GDP: Wednesday, 09:30. This key indicator is released quarterly, and traders should take note, as GDP can be a market-mover. The January reading was up a healthy 0.5%, but the markets are predicting a drop this month of 0.1%. This kind of contraction of the UK economy could hurt the pound.
BBA Mortgage Approvals: Wednesday, 9:30. This is a leading indicator of demand and activity in the residential housing sector. The indicator was quite steady in the last quarter of 2011, and little change is anticipated by the markets.
CBI Industrial Order Expectations: Wednesday, 11:00. This diffusion index is gives an important snapshot of the expectations for orders by UK manufacturers. The index has been in deep negative territory since August, and little improvement is expected this month.
CBI Realized Sales: Thursday, 11:00. This diffusion index looks at the sales volumes of retailers and wholesalers, and as such ins an important indicator of consumer spending. The index improved significantly last month, rising to 9, but the markets are calling for a drop all the way to 1, barely in positive territory. Traders should note that the markets predictions for the index are often way off, and if the actual reading is better than the forecast, this would be bullish for the pound.

* All times are GMT.

GBP/USD Technical Analysis

Pound/dollar started the week at 1.5301. After touching a low of 1.5282, it climbed to a high of 1.5575, breaking through the resistance line of 1.55 (discussed last week) and closed the week at impressive 1.5555.

Technical levels from top to bottom

We begin with the level of 1.59, which provided strong support in November, and is now acting as a major 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 line of 1.5629 is providing strong resistance, but could be tested on a further upswing by the pair.

The round number of 1.55 was breached this week, and is now providing weak support to the pair. 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. This is followed by the weak support line of 1.5280, which was the low for the GBP/USD this week. There is a strong support line at the 1.52 level, followed by support at 1.5120. The final line for now the psychologically important level of 1.50.

I remain bullish on GBP/USD.

GBP/USD had a banner week, even though economic fundamentals clearly favor the US over the UK. Still, if traders like what they see and jump on the bandwagon, the pound rally could continue.

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

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