GBP/USD – British Pound Continues to Struggle, Dips Below 1.60

The British pound continues to have a bad week, as the pound’s slide shows no sign of letting up. In Wednesday’s European session, GBP/USD dropped below the critical 1.60 level, and is currently trading at 1.5990. The pound has now lost close to a cent  in today’s trading. The markets reacted negatively to a World Bank report which downgraded UK growth in 2013. The US released key inflation figures earlier in the day, and the numbers were within expectations. There are no UK releases until Friday.

There was bad news for the UK economy and the British pound, as the World Bank cut its forecast of British growth in 2013. In its Global Economic Prospects report, which is issued twice a year, the prestigious institution said that the UK economy would grow by just 1.1% in 2013, a sharp decline from the June forecast of 1.6% growth. The report had more gloomy news, cutting it outlook for global growth in 2013 from 3.0% to 2.4%, and sounded the alarm over the damage in market confidence due the ongoing fiscal battles in the US. The markets have been concerned for quite some time about the weak UK economy, and there are fears that the economy could be close to a recession, with the Bank of England forecasting that the economy contracted in Q4 of 2012.

Federal Reserve Chairman Bernard Bernanke had little to say about the current round of QE, but he did weigh in on the debt ceiling issue. Speaking at the University of Michigan, Bernanke urged Congress to raise the debt ceiling. Bernanke further noted that having the Federal Reserve tinker with interest rates will not make much difference to the economy. What is critical, he said, is that Congress ensures that the country’s fiscal house is in order. This would lead to higher interest rates as the economy improves. The US is quickly approaching its debt limit of $16.4 trillion, and the issue promises to be a hot topic in Congress,  which is fresh off a bitter fight over the fiscal cliff. That battle left spending cuts and the debt for another day. Republicans have sounded the alarm about the staggering US debt and the crippling effect it can have on the economy. They have vowed to tie the debt ceiling to further spending cuts and want to see cuts to major federal programs such as Medicaid. The Democrats, led by President Obama, are adamantly opposed to cuts in federal programs, and want to deal the issues of the debt ceiling and spending cuts separately.

In economic releases, the markets were focusing on US inflation numbers, but there were no surprises this month. US Core CPI, a key reading, posted a 0.1% for the second straight month. This modest gain fell just short of the forecast of 0.2%. CPI followed suit, posting a flat 0.0%, which matched the market estimate. There was some good news as TIC Long-Term Purchases jumped to $52.3 billion, surprising the markets which had anticipated a much smaller figure of $19.8 billion.

 

GBP/USD for Wednesday, Jan 16, 2013

Forex Rate Graph 17/1/13

GBP/USD Jan 16 at 14:40 GMT

1.5996 H: 1.6081 L: 1.5993

GBP/USD Technical

S3 S2 S1 R1 R2 R3
1.5930 1.5975 1.6062 1.6135 1.6212 1.6273

 

GBP/USD has managed to stop the downward trend, at least for now. The pair is testing support at 1.6062. This line was breached earlier today, and could face more activity if the pound gives up more ground. This is followed by support at 1.5975. On the upside, 1.6135 is the next line of resistance. It has strengthened as the pair has moved lower.
• Current range: 1.5975 to 1.6062.

Further levels in both directions:
• Below: 1.5975, 1.5930, 1.5850, 1.5750 and 1.5468.
• Above: 1.6062 1.6135, 1.6212, 1.6273, 1.6341 and 1.6471.

OANDA Open Positions Ratios

The ratio remains static, despite the drops displayed by GBP/ USD this week. Currently, the short positions make up the larger share of the ratio. Given the volatility of the pair, it is somewhat surprising that the ratio is not showing any movement, and we can expect this to occur at any time.

The pound continues to slump, and has dropped below the critical 1.60 line.  UK data has been week for a long time, and a World Bank report that downgraded UK growth simply underscores the fact that the British economy is in a big hole. This weakness plus uncertainty in Europe could result in nervous investors sticking with the safe-haven dollar, which will make it difficult for the pound to rebound.

GBP/USD Fundamentals

  • 13:30 US Core CPI. Estimate 0.2%. Actual 0.1%.
  • 13:30 US CPI. Estimate 0.0%. Actual 0.0.%
  • 14:00 US TIC Long-Term Purchases. Estimate 19.8B. Actual 52.3B.
  • 14:15 US Capacity Utilization Rate. Estimate 78.6%. Actual 78.8%.
  • 14:15 US Industrial Production. Estimate 0.2%. Actual 0.3%.
  • 15:00 US NAHB Housing Market Index. Estimate 48 points. Actual 47 points.
  • 15:30 US Crude Oil Inventories. Estimate 2.0M.
  • 19:00 US Beige Book

*Key releases are highlighted in bold

*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Kenny Fisher

Kenny Fisher

Currency Analyst at Market Pulse
Kenny Fisher joined OANDA in 2012 as a Currency Analyst. Kenny writes a daily column about current economic and political developments affecting the major currency pairs, with a focus on fundamental analysis. Kenny began his career in forex at Bendix Foreign Exchange in Toronto, where he worked as a Corporate Account Manager for over seven years.