The British pound has started the new trading week with some gains, as the currency tries to recover from sharp losses sustained last week against the US dollar. It was a rollercoaster ride for USD/GBP following the fiscal agreement reached in Congress last week. Initially, the pound climbed higher, but then slumped later in the week, as the currency dropped perilously close to the important 1.60 line. The pound has recovered somewhat, and is currently trading in the 1.6070 range. On Monday, there are no releases out of the US, and there was just one reading from the UK, which was Halifax HPI. The housing inflation indicator started the trading week in fine fashion, posting its highest gain since April.
Market sentiment improved positive following the fiscal cliff agreement, but more trouble lies ahead. Although both the Senate and House of Representatives passed the deal by large margins, there was plenty of grumbling on both sides of the political divide – perhaps proof that the deal reached was a true compromise. Most notably, the hard-fought agreement failed to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and Republicans have vowed that the government must agree to deep spending cuts before they will agree to raise the debt ceiling. For their part, the Democrats are strongly opposed to cuts to major federal programs such as Medicaid. The IMF has also weighed in, saying that the fiscal agreement is not enough, and that the US must take further action to deal with its long-term debt problem. The IMF call for Congress to quickly approve a comprehensive plan which to “ensure both higher revenues and containment of entitlement spending over the medium term”.
Taking a look at fundamentals, Friday’s US employment numbers brought no surprises. Non-Farm Employment Change rose to 155 thousand, which was slightly above the estimate of 150K. The Unemployment Rate edged up from 7.7% to 7.8%. However, the November rate was revised to 7.8%, so there was actually no change. ISM Non-Manufacturing climbed to 56.1 points, its best reading since March. This easily beat the estimate of 54.2 points. In the UK, Net Lending to Individuals was sluggish, as the indicator declined by 0.1 billion pounds, well below the estimate of a 0.4B gain. This weak figure underscores a worrying trend of decreased bank lending in the UK. This negative development is also affecting banks on the Continent, which have been hard hit by the debt crisis. This dire situation has led to a sharp drop in the number of loans by Eurozone banks to private households. Such loans dropped by 0.8% in November compared to a year ago, after a similar decline in October.
The ECB is clearly worried, and blames this trend on weak confidence in the Eurozone economy and increased aversion to risk. Analysts expect credit demand to continue to be weak, and note that the ECB’s decision to cut its deposit rate to zero percent has not boosted bank lending to the private sector. On the flip side, the Eurozone M3 indicator, which measures the amount of money in circulation, jumped by 3.8% in November. This could be an indication that more inflation is on the way in 2013, which could affect interest rates and the value of the euro.
GBP/USD for Monday, Jan 7, 2013
GBP/USD Jan 7 at 17:20 GMT
1.6076 H: 1.6082 L: 1.6022
GBP/USD edged downwards in the Asian session, but then posted some gains during European trading. The pair is receiving weak support at 1.6062. This line could see further action if there is a correction and the pound loses ground. The next support level is at 1.5975. This line held firm during the pound’s nosedive last Thursday, when the pound shed almost 200 pips. On the upside, 1.6135 is providing strong resistance.
• Current range: 1.6062 to 1.6135.
Further levels in both directions:
• Below: 1.6062, 1.5975, 1.5930, 1.5850, 1.5750 and 1.5468.
• Above: 1.6135, 1.6212, 1.6273, 1.6341, 1.6471 and 1.66.
OANDA Open Positions Ratios
Following the pound’s drop late last week, the ratio has shown movement, with a substantial increase in the long positions component. Most positions remain short, but the long position continues to grow. This could be an indication that the pound will continue to make gains against the US dollar, which is the current trade as we begin the trading week.
GBP/USD is on a modest upward move, and this could continue. US employment numbers did not impress the markets and the pound is due for a correction after suffering sharp losses against the dollar last week.
• 8:00 UK Halifax HPI. Estimate 0.2%. Actual 1.3%.
*Key releases are highlighted in bold
*All release times are GMT
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