GBP/USD – Up Sharply as Markets Brace for Fiscal Cliff

On the final trading day of 2012, GBP/USD has moved higher, and has moved into the mid-1.62 range. Despite intensive talks in Washington to try and avert the fiscal cliff, the likelihood of a last minute breakthrough on Capitol Hill before the January1 deadline does not appear likely. Market releases ended the year on a high note in both the US and the UK. US Pending Home Sales jumped 1.7%, well above the forecast of a 0.3% decline. In the UK, Housing Equity Withdrawal fell to a six-month low, and easily beat the market forecast. With the markets closed on Tuesday for the New Year’s holiday, trading volumes remain thin. This has reduced liquidity and could result in increased volatility as we wind up 2012. There are no scheduled releases out of the US on Monday.

All eyes remain glued to Capitol Hill, as the deadlock over fiscal cliff continues. Despite a rare Sunday session of both the Senate and the House of Representatives, and the involvement of President Obama, there is still no progress to report in talks between the Republicans and the Democrats. Both sides remain far apart on the issues of tax increases and cuts to federal programs, with the Republicans reluctant to introduce any tax hikes and the Democrats against spending cuts in federal programs. The Republicans have blocked proposals to raise taxes on earners with incomes above $250,000, and the Democrats are dead set against any cuts to the Medicaid or Social Security programs. Unless a dramatic breakthrough is announced on Monday, the US will go over the fiscal cliff, meaning that $US 650 billion dollars in tax hikes and spending cuts will come into effect on January 1st.

This double-jab could rock the fragile US economy and stifle the nascent economic recovery. Without an agreement on what to do about the US deficit, investor confidence in the US economy could suffer, and credit rating agencies could respond negatively. Lawmakers on both sides have asked US vice-president Joe Biden to lend a hand and try to break the impasse. Senate Majority Leader Harry Reid said he is “hopeful but realistic”, but it’s doubtful if the markets are sharing his sentiment, with only hours left to reach an agreement to avert fiscal cliff.

In Europe, as we approach the end of 2012, the health of the major economies of the major players does not look promising. The UK has joined the likes of Greece, Italy and Spain, as the government has introduced tough and unpopular austerity measures to help get the economy back on its feet. Germany, the economic locomotive of Europe, is in 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.

Looking at US economic data, recent US economic releases typified what we have seen throughout 2012 – a mixed bag of strong and weak data, making it difficult to put a finger on the direction of the US economy. Last week’s Unemployment Claims looked sharp, but Consumer Confidence fell to five-month low. New Home Sales failed to meet the estimate, but Pending Home Sales surprised the markets with a strong gain. Although there are signs that the US economy is improving, this zig-zagging makes it difficult to predict what to expect in early 2013.

GBP/USD for Monday, Dec 31, 2012

GBP/USD Dec 24 at 15:05 GMT

1.6245 H: 1.6258 L: 1.6134

S3 S2 S1 R1 R2 R3
1.6062 1.6135 1.6212 1.6273 1.6341 1.6475

GBP/USD Technical
GBP/USD has made a strong upward move early in the North American session, and easily broke through resistance just above the 1.62 line. The next line of resistance is 1.6273, and this line could see some activity if the pound continues to push higher. On the downside, 1.6212 is now providing support. This line is strengthening as the pair trades at higher levels. As thin trading continues in the early part of the week, look for continuing volatility from the pair.
• Current range: 1.6212 to 1.6273.
Further levels in both directions:
• Below: 1.6212, 1.6135, 1.6062, 1.5975, 1.5940, 1.5825 and 1.5775.
• Above: 1.6273, 1.6341, 1.6475 and 1.66.

OANDA Open Positions Ratios

The pound has flexed some muscle in Monday’s trading, but the move is too recent to be reflected in the GBP/USD ratio. The ratio continues to be strongly biased toward short positions, with most traders expecting the pound to lose ground. Look for the ratio makeup to change if the pound sustains this strong upward move.
The fiscal cliff crisis in Washington continues to dominate economic news and could have a major impact on GBP/USD. The pound stands to benefit in the unlikely scenario that an agreement is reached before the January 1 deadline, as market sentiment will improve and show a greater appetite for risk. Conversely, if as expected ,the US goes over the fiscal cliff, the pound could cough up some of today’s gains, as nervous investors flock to the safety of the US dollar.

GBP/USD Fundamentals
• 9:30 Housing Equity Withdrawal. Estimate -8.0B. Actual -9.1B.
*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

Market Analyst at OANDA
A highly experienced financial market analyst with a focus on fundamental and macroeconomic analysis, Kenny Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in major online financial publications including, Seeking Alpha and FXStreet. Kenny has been a MarketPulse contributor since 2012.