GBP/USD – Pound Struggling as Fed says QE Tightening Likely

After sustaining sharp losses on Wednesday, the pound has managed to stabilize in Thursday trading. GBP/USD was trading in the high-1.54 level in the North American session. The pound started the week above 1.57, but it’s been all downhill as the surging US dollar has sent other currencies tumbling. In economic releases, British Retail Sales, a key indicator, looked very sharp, jumping 2.1%. This was well above the estimate of 0.8%. British CBI Industrial Order Expectations, an important manufacturing indicator, continues to be mired deep in negative territory, posting a dismal reading of -18 points. In the US, Unemployment Claims came in higher than expected, but Existing Home Sales and the Philly Fed Manufacturing Index both beat their estimates.

There was plenty of movement in the currency markets on Wednesday, after Federal Reserve chair Bernard Bernanke said that QE would likely be scaled down in 2013, and could be terminated in 2014, if the economy continues to improve. The Fed said it expects the U.S. economy to grow between 2.3% and 2.6% this year, and unemployment should fall to between 6.5% and 6.8% by the end of 2014. This means that if the US economy shows stronger growth and unemployment falls, there is a strong likelihood that the Fed will scale down QE. It should be remembered that the Federal Reserve is not making any changes at present to QE, which involves bond purchases of $85 billion each month by the Federal Reserve. Bernanke’s comments boosted the dollar against the major currencies, since winding up QE is dollar-positive. 

Also on Wednesday, the BOE released the minutes of the most recent policy meeting of the MPC, which is responsible for the interest rate and asset purchases (QE) decisions. The voting breakdown of the MPC members, which can be a market-mover, yielded no surprises. The vote on maintaining the interest rate at 0.50% was unanimous, in contrast to the QE decision, which passed by a 6-3 vote. BOE Governor Mervyn King, in his final policy meeting, voted with two other members to increase QE to GBP400 billion, but the majority opted to maintain the current levels of GBP375 billion. This breakdown was identical to the pattern at the previous meeting, and was expected by the market, so the release of the minutes did not affect GBP/USD.

G8 summits are often little more than photo-ops and an opportunity for the leaders to take a short break from the workload back home. However, this year’s G8 meeting, hosted by Prime Minister David Cameron, 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 stakes are 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 pact 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 Thursday, June 20, 2013

GBP/USD June 20 at 14:45 GMT

GBP/USD 1.5470 H: 1.5492 L: 1.5415

GBP/USD Technical

After sharp losses on Tuesday, the pound has steadied, and is trading in the mid-1.54 range. The pair is receiving support at 1.5432. This is a weak line, and could face pressure if the US dollar regains momentum.This is followed by strong support at 1.5309, protecting the 1.53 level. On the upside, there is resistance at 1.557. This is followed by resistance at the round number of 1.5700.

• Current range: 1.5432 to 1.5557

Further levels in both directions:

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

OANDA’s Open Positions Ratio

GBP/USD ratio has reversed directions, and is currently pointing to movement towards long positions. This is not reflected in the pair, which has shown little movement on Thursday. Short positions continue to retain a solid majority, indicating a strong bias towards the GBP/USD moving in a downward direction.

The pound has sustained sharp losses against the dollar this week, as have all the major currencies, courtesy of the US Federal Reserve. Will the dollar continue its impressive run? There is only one release on Friday, so the pair could settle down after a busy week. 

GBP/USD Fundamentals

• 8:30 British Retail Sales. Estimate 2.1%. Actual 0.8%.
• 10:00 British CBI Industrial Order Expectations. Estimate -18 points. Actual -15 points.
• 13:15 Bank of England MPC Member Paul Fisher Speaks.
• 12:30 US Unemployment Claims. Estimate 343K. Actual 354K.
• 13:00 US Flash Manufacturing PMI. Estimate 52.5 points. Actual 52.2 points.
• 14:00 US Existing Home Sales. Estimate 5.01M. Actual 5.18M.
• 14:00 US Philly Fed Manufacturing Index. Estimate -0.6 points. Actual 12.5 points.
• 14:00 US CB Leading Index. Estimate 0.2%. Actual 0.1%.
• 14:30 US Natural Gas Storage. Estimate 89B. Actual 91B.

*Key releases are highlighted in bold

*All release times are GMT

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