GBP/USD – Pound Falls as UK Inflation Remains High

The pound is not having a good day in Tuesday trading. GBP/USD has dropped over one cent and is struggling to stay above the 1.56 line in the North American session. The chief culprit for the pound’s drop was CPI, which was higher than what analysts had expected. The BOE has already voiced concern that its inflation target of 2% is too low, and today’s figures will only reinforce that concern. In the US, the markets got their first look at some key data. Building Permits and Core CPI, matched the forecast. Housing Starts improved, but fell short of the estimate.

US releases were mostly within expectations on Tuesday. Building Permits came in at 0.97 million, just shy of the estimate of 0.98 million. Core CPI rose slightly to 0.2%, matching the forecast. CPI also came in exactly as expected, at 0.1%. The only disappointment was Housing Starts, which remained unchanged at 0.91 million. This was short of the estimate, which stood at 0.95 million.

All eyes will be glued to the US Federal Reserve on Wednesday, as the FOMC releases a highly anticipated policy statement. The markets will be particularly interested in what the Fed has to say with regard to its quantitative easing program. Speculation has been growing that the Fed could scale back QE later in the year, and this has had a very strong impact on stocks, commodities and the US dollar. The Federal Reserve has repeatedly stated that it will stick with the current program until it sees an improvement in the US economy, especially in the employment market. Currently the Fed purchases $85 billion in assets every month. If the Fed does take action or even hint at a move to tighten QE, we can expect the dollar to move higher against the major currencies.

G8 summits are often photo-ops with little substance, as confident world leaders step up to the microphones and declare their unwavering commitment to take steps to improve the global economy. However, this year’s G8 meeting in Northern Ireland served more than the usual fare, as the G8 leaders used the occasion to announce the start of negotiations on a free trade agreement between the European Union and the United States. The summit’s host, British Prime Minister David Cameron, said that he was determined to seize this “once-in-a generation prize”. The stakes are indeed very high – the EU and US produce 50% of the global output, and a third of world trade. The deal would be the largest bilateral trade deal ever, and could add up to $100 billion to the economies of each partner. Negotiations will get underway in Washington next month, with a deal expected to be signed by the end of 2014.  

GBP/USD for Tuesday, June 18, 2013

GBP/USD June 18 at 15:00 GMT

GBP/USD 1.5614 H: 1.5720 L: 1.5556 

GBP/USD Technical

The pound has enjoyed a very productive month of June, but sustained a setback on Tuesday. GBP/USD has lost more than one cent, and is struggling in the low-1.56 range.  The pair is receiving support from the 1.5557 line. Given the sharp drop of the pound, this line cannot be considered safe. This is followed by a stronger support at 1.5432. On the upside, the pair faces resistance at 1.5700. This is followed by resistance at 1.580o, which as remained intact since February.

• Current range: 1.5557 to 1.5700

Further levels in both directions:

• Below: 1.5557, 1.5432, 1.5309, 1.5203 and 1.5111
• Above: 1.5700, 1.5800, 1.5800, 1.5869, 1.5916 and 1.60

OANDA’s Open Positions Ratio

GBP/USD ratio has shifted directions on Tuesday, and is pointing to movement in favor of long positions. Currently, however, the pound has fallen sharply against the US dollar. Short positions retain a solid majority, indicating a strong bias towards the pair continuing to move in a downward direction.

The pound has run out of steam, and has lost over a cent on Tuesday. We could see some strong movement from the pair on Wednesday, as the BOE releases its minutes of the previous policy meeting, and the FOMC releases a statement. Any discussion about QE  in the US could be a market-mover.

GBP/USD Fundamentals

• 8:30 British CPI. Estimate 2.6%. Actual 2.7%.
• 8:30 British PPI Input. Estimate 0.1%. Actual -0.3%.
• 8:30 British RPI. Estimate 3.1%. Actual 3.1%.
• 8:30 British Core CPI. Estimate 2.1%. Actual 2.2%.
• 8:30 British CPI. Estimate 2.6%. Actual 2.7%.
• 8:30 British HPI. Estimate 2.6%. Actual 2.6%.
• 8:30 British PPI. Estimate 0.0%. Actual 0.0%.
• 12:30 US Building Permits. Estimate 0.98M. Actual 0.97M.
• 12:30 US Core CPI. Estimate 0.2%. Actual 0.2%.
• 12:30 US CPI. Estimate 0.1%. Actual 0.1%.
• 12:30 US Housing Starts. Estimate 0.95M. Actual 0.91M.
• Day 2 of G8 Meetings.

*Key releases are highlighted in bold

*All release times are GMT

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