GBP/USD – Higher as Markets Eye Fiscal Cliff

The markets reopened after enjoying a short Christmas break. GBP/USD has showed some movement on Thursday, as the pair briefly climbed above the 1.62 line before retracting. The final trading week of the year is usually characterized by quiet trading, but with the fiscal cliff talks going right down to the wire, we could see some volatility in the currency markets. Fiscal cliff talks have resumed in Washington, as the markets keep a close eye on developments. In fundamental news, US Unemployment Claims rebounded from last week and easily beat the market estimate. However, CB Consumer Confidence and New Home Sales both fell below the estimate. In the UK, BBA Mortgage Approvals showed little change, and came in slightly below the forecast.

All eyes are on Washington, where Congress has reconvened and the tough negotiations over the fiscal cliff crisis continue. After all the finger-pointing and tough rhetoric over the past few months, it’s crunch time in Washington. If the Democrats and Republicans don’t find some common ground, tax hikes and spending cuts worth some $650 billion will go into effect on January 1. This double-jab could send the economy reeling and push the US into a recession in 2013. Can the two sides hammer out an agreement? The markets are hoping that at the very least, some type of stop-gap measure can be reached before the deadline. This would provide some breathing room while negotiations for a comprehensive deal continue, and hopefully calm down the jittery markets. What does the fiscal crisis mean for GBP/USD? An agreement would likely be dollar negative, as investors would feel more comfortable taking more risk. Conversely, if there are no signs of progress, market sentiment will sour and investors will flock to the safety of the US dollar.

In Europe, as we approach the end of 2012, the health of the economies of the major players in the Eurozone does not look promising. Unemployment is rampant in Greece and Spain, and Italy and France are also experiencing high unemployment. With these major economies facing small or even negative growth, there may not be a lot to cheer about in the early part of 2013. Germany, the economic locomotive of Europe, is in much better shape, but is suffering from slower growth and higher unemployment. On the brighter side, there has been significant progress in the Greek debt crisis, as aid is again flowing to Athens. As well, a framework has been agreed upon concerning a greater supervisory role for the ECB, with the goal of minimizing the impact of future banking crises in the Eurozone.

In fundamental news, there were two releases out of the US on Wednesday. The S&P/CS Composite-20 HPI, an important housing inflation index, continued its recent upward swing, with an excellent 4.3% gain. However, the Richmond Manufacturing Index dropped to 5 points, well below the market forecast of 12 points. On Thursday, US unemployment Claims rebounded from last week’s showing and dropped to 350K. This easily beat the market forecast of 365K. The news was not as positive from the other releases. CB Consumer Confidence dropped sharply to 65.1 points, a four-month low. New Home Sales came in at 372K, falling below the estimate for a second straight month.
In the UK, BBA Mortgage Approvals showed little change from the previous release, coming in at 33.6 thousand. This fell below the estimate of 34.6K.

GBP/USD for Thursday, Dec 27, 2012

GBP/USD Dec 24 at 14:55 GMT

1.6161 H: 1.6202 L: 1.6124

GBP/USD Technical
GBP/USD continues to show movement, and has again tested the 1.62 line, only to retract back to the mid-1.61 level. There is weak support for the pair at 1.6135. This line has seen activity throughout the week, and this could continue as the pair fluctuates. On the upside, 1.6212 continues to hold firm. This line was briefly breached late last week when the pound lost ground, but continues to provide resistance. 1.6273 is the next line of resistance.
• Current range: 1.6135 to 1.6212.
Further levels in both directions:
• Below: 1.6135, 1.6062, 1.5975, 1.5940, 1.5825 and 1.5775.
• Above: 1.6212, 1.6273, 1.6341, 1.6475 and 1.66.

OANDA Open Positions Ratios
GBP/USD to fluctuate in the final trading week of the year. The ratio continues to be strongly biased toward short positions, as trader sentiment is expecting the pound to lose ground. Look for the ratio between long and short positions to change if the pair continues to show movement.
The fiscal cliff crisis in Washington continues to dominate economic news as Congress reconvenes, and could have a major impact on GBP/USD. The pound stands to benefit if an agreement is reached, as market sentiment will improve and show a greater appetite for risk. Conversely, if the impasse continues into January with no progress to report, the dollar will likely pick up ground, as nervous investors flock to the safety of the US dollar.

GBP/USD Fundamentals
• 9:30 BBA Mortgage Approvals. Estimate 34.6K. Actual 33.6.
• 13:30 US Unemployment Claims. Estimate 365K. Actual 350K.
• 15:00 US CB Consumer Confidence. Estimate 70.3 points. Actual 65.1 points.
• 15:00 US New Home Sales. Estimate 382K. Actual 377K.
*Key releases are highlighted in bold
*All release times are GMT

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