GBP/USD – Pound Under Pressure As Debt Deal Close

The British pound remains under pressure, as GBP/USD has posted modest losses in Tuesday trading.  In the North American session, the pair is trading in the mid-1.59 range. In economic news, the UK released a host of inflation indicators. Most readings, including CPI, were within expectations, although PPI Input posted a sharp decline. In the US, the Empire State Manufacturing Index disappointed, as the indicator slumped to a five-month low. In Washington, there are reports that the sides are close to an agreement on the looming debt ceiling as well as the government shutdown, which has entered its third week.

In the UK, Tuesday’s highlight was CPI, one of the most important economic indicators. The index has been quite steady, and posted a gain of 2.7% for the second straight month. This edged past the estimate of 2.6%. Most of the other inflation indicators were within expectations. PPI Input, an important manufacturing inflation index, posted a second straight decline, dropping by 1.2%, well off the estimate of -0.1%. The pound showed little reaction to today’s releases, but it could be a different story on Wednesday, when Claimant Count Change will be released.

Politicians in Washington are scrambling to reach some agreement before the US hits the debt ceiling on Thursday. If Congress fails to agree on raising the debt limit before then, the US treasury will be unable to pay the country’s bills. This could lead to the US defaulting on its debt, which could cause chaos in the domestic and international markets. High-level talks over the weekend failed to break the impasse, but Senate Majority Leader Harry Reid sounded optimistic on Monday, saying that the sides had made “tremendous progress”. The talks are focusing on raising the debt ceiling for several more months until a more comprehensive agreement can be reached. Presumably, an agreement would also end the government shutdown, at least temporarily, allowing the government to resume operations.

The debt ceiling crisis is generating headlines the world over, as a US default on its financial obligations could lead to severe damage to the global economy. The US is being urged to get its act together, and quickly. The IMF has warned that the continuing uncertainty emanating out of Washington could lead to a world recession. ECB President Mario Draghi has also weighed in, saying that it was “unthinkable” that Congress would not reach an agreement on the debt ceiling.

QE tapering, one of the hottest topics in the markets just a few weeks ago, has quickly moved to the backburner, courtesy of the budget and debt ceiling crises which have gripped Washington. Last week, the Fed released the minutes of its September policy meeting. At that meeting, the Fed surprised the markets by not reducing its bond-purchasing program, which currently runs at $85 billion/mth. The minutes stated that the decision not to begin tapering was a “close call”. This has raised speculation that we could see tapering before the end of the year. However, the Fed is reluctant to make any major moves in the midst of the political crisis the US is currently experiencing. As well, the Fed is “data dependent”, and key releases such as Non-Farm Payrolls have been suspended to the shutdown. This makes it difficult for the Fed to get an accurate picture of the true state of the economy. The bottom line? We’re unlikely to see any QE moves by the Fed before December, at the earliest.

GBP/USD for Tuesday, October 15, 2013

GBP/USD October 15 at 14:20 GMT

GBP/USD 1.6007 H: 1.6016 L: 1.5947

GBP/USD Technical

• GBP/USD has posted modest losses on Tuesday. The pair touched a low of 1.5916 in the European session but has moved higher.
• The pair continues to face resistance at 1.6125. This is followed by a resistance line at 1.6231.
• On the downside, the pair is testing the 1.60 line and dipped below this line earlier. This is followed by support at 1.5877.
• Current range: 1.6000 to 1.6125

Further levels in both directions:

• Below: 1.6000, 1.5877, 1.5756, 1.5645 and 1.5527
• Above: 1.6125, 1.6231, 1.6300 and 1.6421

OANDA’s Open Positions Ratio

A majority of the open positions in the GBP/USD ratio are short, reflecting a trader bias towards the US dollar posting further gains against the pound.

GBP/USD is trading in the mid-1.59 range. With no major releases out of the US on Tuesday, we can expect limited movement from the pair for the remainder of the North American session, unless there is a dramatic breakthrough in Washington.

GBP/USD Fundamentals

• 1:00 Federal Reserve Chairman Bernard Bernanke Speaks
• 8:30 British CPI. Estimate 2.6%. Actual 2.7%
• 8:30 British PPI Input. Estimate -0.1%. Actual -1.2%
• 8:30 British RPI. Estimate 3.2%. Actual 3.2%
• 8:30 British Core CPI. Estimate 2.0%. Actual 2.2%
• 8:30 British HPI. Estimate 3.6%. Actual 3.6%
• 8:30 British PPI Output. Estimate 0.3%. Actual -0.1%
• 9:00 Bank Of England MPC Member Paul Weale Speaks
• 12:30 US Empire State Manufacturing Index. Estimate 8.2 points. Actual 1.5 points
• 14:00 FOMC Member William Dudley Speaks

*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.