GBP/USD – Pound Under Pressure Ahead of BOE Meeting

The British pound is weakening against the dollar in Wednesday trading. The British currency has lost close to a cent on the day, as it struggles in the mid-1.50 range. The pound is under strong pressure ahead of key policy meetings of the Bank of England and ECB on Thursday. Today’s major release looked sharp, as US ADP Non-Farm Payrolls easily beat the market forecast.

Wednesday’s British numbers were positive, but that didn’t rub off on the pound, which has slumped on Wednesday. BRC Shop Price Index climbed 1.1%, a robust gain compared to 0.6% the month before. Halifax HPI, an important housing inflation indicator, bounced back from a weak reading in January and climbed 0.5%. This beat the estimate of 0.4%. However, the positive releases weren’t much help for the pound, which can’t seem to find its footing and has lost close to one cent on Wednesday. The pound is under strong pressure as the markets cast a nervous eye on the BOE and ECB, both of which set interest rates on Thursday. The BOE will also announce its QE level, and their have been rumblings of increasing QE, which would be bearish for the British currency. With the UK economy continuing to struggle, the markets are braced for a pessimistic statement from the BOE on Thursday.

As if the Eurozone doesn’t have enough problems, the political deadlock continues in Italy, as the political crisis, which has paralyzed the Eurozone’s third largest economy, shows no signs of a breakthrough. The head of the Center-left bloc, Pier Luigi Bersani, urged the maverick leader of the 5-Star Movement, Beppe Grillo, to support a new government or agree to new elections. So far, Grillo has refused to throw his support behind any other party, resulting in a political deadlock that threatens to paralyze the Eurozone’s third largest economy. Grillo, a former comedian, has not minced his disdain for the established political leaders, and called Bersani a “dead man walking”. The stalemate could force new elections in a country weary from a sluggish economy, a staggering debt and a dysfunctional electoral system. Meanwhile, Grillo suggested that Italy hold a referendum on whether to remain in the Eurozone. Italy is facing a crushing debt of two trillion euros, and Grillo has called for the country to renegotiate terms. Grillo, who led his party to a stunning showing in last week’s election, can now play kingmaker in any coalition talks, and his rhetoric attacking the euro and harsh spending cuts can no longer be dismissed. Many analysts believe that Grillo, who has risen to political prominence thanks to a huge protest vote, would prefer returning to the polls rather than forming a coalition with the established parties.

Back in the US, Janet Yellen, vice-chair of the US Federal Reserve, underscored the Federal Reserve’s intent to continue its current QE program and ultra-low interest rates. Yellen said that she hoped that the low interest rates would facilitate a “return to prudent risk-taking”. The current round of QE involves the purchase of $85 billion in assets each month, and critics have expressed the fear that this could lead to “asset bubbles”. However, both Fed Chair Bernanke and Yellen have argued that the benefits of a stronger recovery outweigh any such risks. Defending the Fed’s asset purchases, Yellen cited a study which found that when the central bank purchases $500 billion in bonds, unemployment drops a quarter of a percentage point within three years. Yellen’s remarks come on the heels of Beranke’s testimony on Capitol Hill, where he defended the Fed’s monetary policy.

GBP/USD for Wednesday, Jan 21, 2013

1.5054 H: 1.5154  L: 1.0542

GBP/USD Technical

The pound has dropped sharply on Wednesday, as it struggles in the mid-1.50 range. On the downside, the pair is testing 1.5053. This line has already been breached today, and is likely to face more pressure. The line of 1.4988 is stronger.  The pair faces resistance at 1.5138. This line has strengthened as the GBP/USD trades at lower levels.

• Current range: 1.5053 to 1.5138.

Further levels in both directions:

• Below: 1.5053, 1.4988, 1.4880 and 1.4818
• Above: 1.5138, 1.5203, 1.5309, 1.5395, 1.5481 and 1.5565

OANDA Open Positions Ratios

The GBP/USD ratio is not showing any movement in Wednesday trading. This, despite the sharp losses the pound has sustained courtesy of the US dollar. If the pound continues to slump, we can  expect some activity from the ratio. The long position component enjoys a sizeable majority, indicating that trader sentiment remains strongly biased towards the pound recovering and moving higher against the dollar.

The pound continues to sag, and we could see GBP/USD make a move towards the all-important 1.50 level. Traders should expect volatility from the pair on Thursday as the ECB announces its interest rate, while the BOE sets interest rates as well as Asset Purchase Facility.

GBP/USD Fundamentals

• 00:01 British BRC Shop Price Index. Actual 1.1%
• 8:00 British Halifax HPI. Estimate 0.4%. Actual 0.5%
• 9:45 BOE Governor Mervyn King Speaks
• 13:30 US ADP Non-Farm Employment Change. Estimate 172K. Actual 198K
• 15:00 US Factory Orders. Estimate -2.2%. Actual -2.0%
• 15:30 US Crude Oil Inventories. Estimate 0.9M
• 19:00 US Beige Book.

*Key releases are highlighted in bold

*All release times are GMT

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