GBP/USD – Pound Gets Boost from UK Employment Data, Shrugs Off Fed Taper

The US dollar rose against most of the major currencies on Wednesday, but the pound was a notable exception, as the currency posted sharp gains against the dollar. GBP/USD jumped over one cent on the day, thanks to strong employment numbers out of the UK. Later in the day, the Federal Reserve announced that it would taper its QE program by $10 billion each month, commencing in January. The dollar has steadied on Thursday, as the pair trades in the mid-1.63 range in the North American session. In Thursday’s economic news, UK Retail Sales bounced higher and posted a 0.3% gain, matching the forecast. Over in the US, Unemployment Claims were much higher than expectations for the second straight week. There was more bad news, as Existing Home Sales and the Philly Fed Manufacturing Index were both well short of their estimates.

After months of standing on the sidelines, Federal Reserve Chairman Bernard Bernanke finally played his hand on Wednesday. At its policy meeting, the Fed announced that it was tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed’s asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had expected the Fed to hold off on any QE reductions until early next year.

In its dramatic taper announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the unemployment rate at 7.0%, it could be a while before we see higher interest rates in the US.

Meanwhile, US releases on Thursday were dismal. Unemployment Claims jumped to 378 thousand claims last week, up from 368 thousand the week before. This was well above the estimate of 336 thousand. Last week’s weak numbers were attributed to the holiday season, but two consecutive bad releases will certainly not comfort to the markets.  There was more  bad news to follow. Existing Home Sales posted its third consecutive decline, dropping to 4.90 million compared to 5.12 million in the previous release. The Philly Fed Manufacturing Index rose from 6.5 to 7.0 points, but this was way off the estimate of 10.3 points.

Key British releases continue to look strong, which has helped the pound trade at high levels against the dollar. On Thursday, Retail Sales posted a gain of 0.3%, up sharply from the -0.7% reading last month. British employment numbers continued to impress in November. Employment Change continues to post sharp drops, a pattern which we’ve seen since mid-2013. The key indicator came in at -36.7 thousand, beating the estimate of -35.2 thousand. The unemployment rate dropped unexpectedly to 7.4%, its lowest level since May 2009. The markets had expected the rate to remain unchanged at 7.6%. Meanwhile, the breakdown of the BOE’s vote on QE and the Official Bank Rate were both unanimous (9-0) decisions. At the last policy meeting, the Bank maintained QE at 375 billion pounds and the Official Bank Rate at 0.50%.

 

GBP/USD for Thursday, December 19, 2013

Forex Rate Graph 21/1/13

GBP/USD December 19 at 15:45 GMT

GBP/USD 1.6383 H: 1.6396 L: 1.6335

 

GBP/USD Technical

S3 S2 S1 R1 R2 R3
1.6125 1.6231 1.6300 1.6476 1.6600 1.6705

 

  • GBP/USD has reversed directions and posted modest losses in Thursday trading. The pair has touched a low of 1.6335 in the North American session.
  • The round number of 1.6300 continues to provide support after the sharp gains by the pound. This is followed by support at 1.6231.
  • On the upside, the pair is facing resistance at 1.6476. The next resistance line is at 1.6600, which has not been tested since August 2011.
  • Current range: 1.6300 to 1.6476

 

Further levels in both directions:

  • Below: 1.6300, 1.6231, 1.6125, 1.6000 and 1.5893
  • Above: 1.6476, 1.66, 1.6705 and 1.6964

 

OANDA’s Open Positions Ratio

GBP/USD ratio has reversed directions on Thursday and is pointing to gains in short positions. This is reflected in the pair’s current movement, as the pound has edged lower. Short positions continue to dominate the ratio, reflecting a trader bias towards the US dollar continuing to post gains against the pound.

The pound has steadied on Thursday after recording sharp gains the day before. Today’s key releases out of the US looked awful, but GBP/USD is not showing much movement so far in the North American session.

 

GBP/USD Fundamentals

  • 9:30 British Retail Sales. Estimate 0.3%. Actual 0.3%.
  • 13:30 US Unemployment Claims. Estimate 336K. Actual 379K.
  • 15:00 US Existing Home Sales. Estimate 5.04M. Actual 4.90M.
  • 15:00 US Philly Fed Manufacturing Index. Estimate 10.3 points. Actual 7.0 points.
  • 15:00 US CB Leading Index. Estimate 0.7%. Actual 0.8%.
  • 15:30 US Natural Gas Storage. Estimate -260B. Actual -285B.

 

*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.