GBP/USD – Pound Continues to Drop as Inflation Weakens

The British pound continues to lose ground on Tuesday. The pair is trading in the mid-1.58 range in Tuesday’s North American session as the dollar continues to put pressure on the British currency. The pound has now lost about 150 points since Friday. In economic news, British inflation indicators, led by CPI, were a major disappointment. There are no releases out of the US on Tuesday.

The UK released a host of inflation indicators on Tuesday, and the numbers were disappointing, as almost all of the indicators fell short of their estimates. The key release was CPI, one of the most important economic releases. The index posted a gain of 2.2% in October, compared to 2.7% the month before. This was short of the estimate of 2.5%. Other inflation indicators also disappointed, pointing to weakening inflation in the UK economy. This will likely diminish expectations of a rate hike by the BOE in response to improving economic numbers.

The BOE set interest rates and QE levels late last week and there were no surprises from Mark Carney and his colleagues. The benchmark interest rate was kept at 0.50%, while asset purchase facility was maintained at 375 billion pounds. The BOE has pegged interest rates at 0.50% since 2009 and Governor Mark Carney has said that the Bank would not lower rates before the unemployment rate falls below 7.0%. Currently, unemployment is at 7.7%. The Bank is forecasting that we won’t reach that point prior to 2016, but with British economic indicators continuing to point upwards, many investors feel that this target will be reached much sooner.

Over in the US, the markets had very low expectations from Non-Farm Payrolls, one of the most important economic indicators. The estimate for the October release stood at just 121 thousand, as there was concern that the reading would be artificially low due to the government shutdown in October. However, the indicator put those concerns to rest, as the indicator soared to 204 thousand, its highest level in eight months. The outstanding NFP figure bolstered the US dollar against the major currencies, and has increased speculation that the Fed might press the tapering trigger in December. Such talk could bolster the US currency, as a reduction in QE is bullish for the dollar. At the same time, speculation about a scaling down in QE introduces some uncertainty and volatility in the currency markets.

 

GBP/USD for Tuesday, November 12, 2013

Forex Rate Graph 21/1/13

GBP/USD November 12 at 15:35 GMT

GBP/USD 1.5936 H: 1.5994 L: 1.5854

 

GBP/USD Technical

S3 S2 S1 R1 R2 R3
1.5645 1.5756 1.5877 1.6000 1.6125 1.6231

 

  • GBP/USD is showing some volatility in Tuesday trading. The pair crashed below the 1.59 line early in the European session, touching a low of 1.5854. GBP/USD rebounded and crossed above 1.59 late in the European session.
  • 1.6000 continues to provide resistance. There is stronger resistance at 1.6125.
  • GBP/USD is receiving support at 1.5877. Will this line hold firm against a slumping pound? This is followed by a support level at 1.5756, which has held firm since mid-September.
  • Current range: 1.5877 to 1.6000.

 

Further levels in both directions:

  • Below: 1.5877, 1.5756 and 1.5645 and 1.5537
  • Above: 1.6000, 1.6125, 1.6231, 1.6300 and 1.6476

 

OANDA’s Open Positions Ratio

GBP/USD ratio has reversed directions in Tuesday trading, and is pointing to movement towards long positions. This is not reflected in the current movement of the pair, as the pound continues to lose ground to the dollar. Short positions continue to dominate the open positions, reflecting a trader bias towards the US dollar continuing to move to higher ground.

The pound is struggling, and lost more ground following a weak CPI release for October. With no US releases on Tuesday, the pair’s movement in the North American session could be limited in scope.

 

GBP/USD Fundamentals

  • 8:30 British CPI. Estimate 2.5%. Actual 2.2%.
  • 8:30 British PPI Input. Estimate -0.8%. Actual -0.6%.
  • 8:30 British RPI. Estimate 3.0%. Actual 2.6%.
  • 8:30 British Core CPI. Estimate 2.0%. Actual 1.7%.
  • 8:30 British HPI. Estimate 4.1%. Actual 3.8%.
  • 8:30 British PPI Output. Estimate 0.0%. Actual -0.3%.
  • 9:00 British CB Leading Index. Actual 1.5%.

 

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.