GBP/USD – Pound’s Woes Continue as UK Government Announces Deep Spending Cuts

The British pound continues to lose ground against the US dollar in the Wednesday session. GBP/USD is trading in the mid-1.53 in the North American session. The pair dropped as market reaction was negative after the UK government announced deep spending cuts. As well, the BOE released its Financial Stability Report. In the US, Final GDP disappointed, coming in well below the forecast. The pound has now lost about four cents since early last week.

The markets got a look at USD GDP numbers on Wednesday, and the results were less than impressive. Final GDP did rise nicely, from 0.4% to 1.8%, but this was well short of the estimate of 2.4%. The Final GDP Price Index rose 1.2%, edging past the estimate of 1.1%. The weak GDP release put a damper on a bright market mood thanks to excellent US numbers on Tuesday. Core Durable Goods, CB Consumer Confidence and New Home Sales, all key releases, beat their estimates. Manufacturing data, often a sore spot, also looked good as the Richmond Manufacturing Index had its best performance since last November. The strong numbers are particularly encouraging as they come from a wide range of economic sectors.

There was more tough medicine from U.K. Chancellor of the Exchequer George Osborne on Wednesday. Osborne outlined the projected spending cuts the government will make starting in 2015 and which will last till 2018. The government plans to cut some GBP 11.5 billion from government ministries, as the austerity program continues for a sixth straight year. Osborne said he was forced to take drastic action due to a weak British economy and lower than expected tax revenue. The new cuts are sure to be unpopular with the public, and the opposition Labor Party has sharply criticized the deep spending cuts and accused the government of mismanaging the economy.   

The Eurozone is the UK’s largest trade partner, so developments in the Eurozone, both good and bad, can have a major impact on the UK and the British pound. The Eurozone economy continues to sputter, and there are serious concerns about the health of the German economy. Long considered the locomotive of Europe, the largest economy in the Eurozone continues to churn out weak data. Last week, German Manufacturing PMI remained under the 50-point level, indicating contraction in the manufacturing sector. German PPI also disappointed, posting a decline of -0.3%. On Monday, German Ifo Business Climate, a key indicator, came in at 105.9 points, just short of the estimate of 106.0. There was good news on Wednesday as German Consumer Climate beat the estimate, but the markets will want to see a steady output of positive numbers from Germany before there can be serious talk of a Eurozone recovery.

The US dollar surged last week after Federal Reserve Chair Bernard Bernanke said that the Fed was planning to scale down QE. However, US (and global) stock markets fell sharply on the news, and the Fed finds itself trying to contain the damage and calm the nervous markets. Dallas Fed President Richard Fisher declared that “tapering” should not be confused with “tightening” and said that the Fed was not exiting from its accommodative policy action just yet. Minneapolis Fed President Naraya Kocherlakota reiterated that the Fed was continuing with an expansionary monetary policy event if QE was terminated, and said that it was a misperception to assume that the Federal Reserve had turned more hawkish. One can be excused for dismissing these statements as little more than linguistic acrobatics, and it is questionable if the markets will be reassured by these statements from the Fed, which were clearly aimed at damage control and calming nervous investors.

GBP/USD for Wednesday, June 26, 2013

GBP/USD June 26 at 15:30 GMT

GBP/USD 1.5327 H: 1.5440 L: 1.5316

GBP/USD Technical

GBP/USD continues to slide in Wednesday trading. On the downside, the pair is testing 1.5309, and we  could see this line fall if the pound continues to retreat. There is a strong support level at 1.5203, protecting the 1.52 line. On the upside, there is resistance at 1.5432. This line has strengthened as the pair trades at lower levels. The next resistance line is at 1.5557.

• Current range: 1.5309 to 1.5432

Further levels in both directions:

• Below: 1.5309, 1.5203, 1.5111 and 1.5000
• Above: 1.5432, 1.5557, 1.5700, 1.5800, and 1.5869

OANDA’s Open Positions Ratio

GBP/USD ratio is almost unchanged in the Wednesday session. This is not currently reflected in the pair, as the dollar has posted fresh gains against the pound. Short positions continue to retain a solid majority, indicating a strong bias towards the GBP/USD moving in a downward direction.

In the US, GDP numbers were a disappointment, but the dollar got a boost against the pound as the UK government announced deep spending cuts as it struggles to keep a sputtering economy above water. Traders should be prepared for some more activity from GBP/USD on Thursday, when both the US and UK will scheduled to post key events. The UK releases Current Account and Final GDP, while the US releases the always-important Unemployment Claims.

GBP/USD Fundamentals

• 9:30 Bank of England Governor Mervyn King Speaks
• 9:30 Bank of England Financial Stability Report
• 11:30 UK Government Spending Review
• 12:30 US Final GDP. Estimate 2.4%. Actual 1.8%.
• 12:30 US Final GDP Price Index. Estimate 1.1%. Actual 1.2%.
• 14:30 US Crude Oil Inventories. Estimate -1.9M. Actual 0.0M.

*Key releases are highlighted in bold

*All release times are GMT

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