GBP/USD – Pound Continues to Slide, Tests 1.51 Line

The British pound continues to lose ground, and was testing the 1.51 line in Monday trading. The pound is struggling to find its footing after the Moody’s credit rating agency downgraded the UK on Friday. Today’s only UK release was BBA Mortgage Approvals, which came in  below the estimate. There are no releases out of the US on Monday.

The pound picked up where it ended last week, and continued its downward slump. GBP/USD dipped below the 1.51 line earlier on Monday, and this line looks as though it could fall, as the British currency struggles to finds its footing. The pound took a beating from the US dollar last week, and received a sharp jab just before the trading week closed, as Moody’s downgraded the UK’s credit rating. The well-respected credit rating agency lowered its outlook one level, from Aa1 to Aaa. Moody’s cited the UK’s high debt level and the deterioration in the government’s finances. Analysts were not surprised by the move, as the UK economy has been stumbling, and the government admits that it cannot meet its fiscal targets. The pound has now depreciated about 5.5% in 2013, reflecting weaker sentiment about the health of the British economy.

With only one economic release out of the UK on Monday, all eyes are focused on the Italian Parliamentary elections. Preliminary results are expected later on Monday. The election race has been tight, with center-left leader Pier-Luigi Bersani favored to win the most seats. Most analysts expect Bersani to forge a coalition with outgoing Prime Minister Mario Monti, if he is given the chance to do so. Former Prime Minister Silvio Berlusconi, known for his outspoken manner and his controversial style, has certainly made the election more colorful. However, the markets clearly prefer a strong showing by Bersani and Monti, who would likely continue current economic policy. Besides concerns that Berlusconi could do well, the markets are worried about an inconclusive vote, which could usher in a period of political uncertainty in Italy, at a time when the Italian economy is struggling and weighed down by tough austerity measures. If the election results do not fall in line with the market’s hopes, we could see investor’s dump pounds in favor of the safe-haven US dollar.

In the US, the Federal Reserve released the minutes of its most recent policy meeting last week. In the meeting, members raised the possibility of ending the current round of QE even before the US employment situation improves, due to concern about the negative effect that QE could have on the financial markets. The Fed has left QE open-ended, but has previously stated that it would not end before unemployment fell to 6.5%. Meanwhile, the markets are having a tough time measuring the extent of the US recovery, as US data continues to paint a mixed picture. Last week’s numbers pointed to more of the same. Unemployment Claims came in higher than forecast, disappointing the markets. Existing Home Sales managed to beat the estimate, but Housing Starts failed to meet expectations. The manufacturing sector continues to stumble, as the Philly Fed Manufacturing Index dropped sharply. Despite the lackluster fundamentals, the dollar has been broadly stronger, and has had no problem making gains against the British pound.

 

GBP/USD for Monday, Feb 25, 2013

Forex Rate Graph Monday, February 25, 2013

GBP/USD Feb 25 at 14:50 GMT

1.5113 H: 1.5163 L: 1.5087

 

GBP/USD Technical

S3 S2 S1 R1 R2 R3
1.4880 1.4988 1.5053 1.5138 1.5203 1.5309

 

The pound continues to lose ground, as it tests the 1.51 line. The pair is facing weak resistance at 1.5138. There is stronger resistance at 1.5203. On the downside, 1.5053 is the next line of support. Given the current downward trend, this line could face activity. There is stronger support just below the all-important 1.50 level, at 1.4988.

  •  Current range: 1.5053 to 1.5138

 

 Further levels in both directions:

  • Below: 1.5053, 1.4988, 1.4880 and 1.4818
  • Above: 1.5138, 1.5203, 1.5309, 1.5395, 1.5481 and 1.5565

 

OANDA’s Open Positions Ratios

The GBP/USD ratio is showing strong movement in favor of short positions. This is in line with what we are seeing from the currency pair, as the pound struggles to stay above the 1.51 line.

The pound has looked awful against the US dollar, and the Moody’s downgrade was just more oil on the fire for the struggling currency. If the downward momentum continues, we could see the critical 1.50 line come under pressure. The markets will be carefully monitoring the BOE Inflation Report, which will be released Tuesday. This event should be treated as a market-mover, which could affect the direction of GBP/USD.

 

GBP/USD Fundamentals

  • 9:30 British BBA Mortgage Approvals. Estimate 34.2K. Actual 32.3K.

 

*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.