GBP/USD – Further Sharp Losses as UK Current Account Falters

The British pound can’t seem to catch a break. On Wednesday, the pound took hit as the British government announced deep spending cuts. On Thursday, UK Current Account, a key indicator, posted a much larger deficit than expected, and the pound responded by dropping another full cent. UK Final GDP fared better as it matched the forecast. In the US, Unemployment Claims was very close to the estimate, while Pending Home Sales sparkled. In Thursday’s North American session, GBP/USD is trading in the low 1.52 range, its lowest levels since early March. The pound has now lost over five cents in the past 10 days.

Current Account was the UK’s only major release this week, and any hopes that we would see some improvement were dashed, as the deficit continues to put on weight. The indicator rose to a deficit of GBP-14.5 billion, way off the estimate of GBP-11.9 billion. No less worrying is the fact that the deficit has been steadily rising since Q1 of 2012. Traders should note that this key indicator is directly related to currency demand, as a rising deficit means that foreigners are purchasing less British pounds to execute transactions, which hurts the value of the pound.

The pound has not only taken a hit from bad domestic news, but also has had to contend with strong US numbers this week. On Thursday, US Unemployment claims fell to 346 thousand, just below the estimate of 347 thousand. Pending Home Sales skyrocketed, posting a gain of 6.7%, its highest since 2006. This crushed the estimate of a 1.1% gain.  On Tuesday, Core Durable Goods, CB Consumer Confidence and New Home Sales, all key releases, beat their estimates. Manufacturing data, often a sore spot, also looked good as the Richmond Manufacturing Index had its best performance since last November. Wednesday’s GDP figures missed the estimate, but the markets didn’t react negatively, as the US dollar held firm against the major currencies. These solid numbers are particularly encouraging, as they come from a wide range of economic sectors. If US indicators continue to point upward, the Federal Reserve could act and start to reduce QE. Such a move would likely have a dramatic positive effect on the US dollar.

There was more tough medicine from U.K. Chancellor of the Exchequer George Osborne on Wednesday. Osborne outlined the projected spending cuts the government will make starting in 2015 and which will last till 2018. The government plans to cut some GBP 11.5 billion from government ministries, as the austerity program continues for a sixth straight year. Osborne said he was forced to take drastic action due to a weak British economy and lower than expected tax revenue. The new cuts are sure to be unpopular with the public, and the opposition Labor Party has wasted no time in criticizing the spending cuts and blaming the government of mismanaging the economy.

QE has been in the headlines lately, but the Fed seems to be sending out conflicting signals. The US dollar surged last week after Federal Reserve Chair Bernard Bernanke said that the Fed was planning to scale down QE. However, US (and global) stock markets fell sharply on the news, and the Fed finds itself trying to contain the damage and calm the nervous markets. Dallas Fed President Richard Fisher declared that “tapering” should not be confused with “tightening” and said that the Fed was not exiting from its accommodative policy action just yet. Minneapolis Fed President Naraya Kocherlakota reiterated that the Fed was continuing with an expansionary monetary policy event if QE was terminated, and said that it was a misperception to assume that the Federal Reserve had turned more hawkish. One can be excused for dismissing these statements as little more than linguistic acrobatics, and it is questionable if the markets will be reassured by these statements from the Fed, which are clearly aimed at damage control and reassuring nervous investors.

GBP/USD for Thursday, June 27, 2013

GBP/USD June 27 at 15:25 GMT

GBP/USD 1.5228 H: 1.5347 L: 1.5203

GBP/USD Technical

GBP/USD continues to slide in Thursday trading. On the downside, the pair is putting pressure on 1.5203, which is protecting the 1.52 line. This line looked strong at the start of the week, but has weakened badly as the pound continues to sag. There is stronger support at 1.5111. This line has remained intact since mid-March. On the upside, there is resistance at 1.5309. This is followed by resistance at 1.5432, which has strengthened as the pair trades at lower levels. 

• Current range: 1.5203 to 1.5309

Further levels in both directions:

• Below: 1.5203, 1.5111, 1.5000 and 1.4896.
• Above: 1.5309, 1.5432, 1.5557, 1.5700, 1.5800, and 1.5869

OANDA’s Open Positions Ratio

GBP/USD ratio has swung into action on Thursday, with sharp movement towards long positions. This can be explained by the fact that numerous short positions being covered as the pound drops to lower levels, leaving a higher percentage of open long positions. This strong movement has resulted in an even split between long and short open positions.

GBP/USD Fundamentals

• 8:30 British Current Account. Estimate -11.9B. Actual -14.5B.
• 8:30 British Final GDP. Estimate 0.3%. Actual 0.3%.
• 8:30 British Revised Business Investment. Estimate -0.4%. Actual -1.9%.
• 12:30 US Unemployment Claims. Estimate 347K. Actual 347K.
• 12:30 US Core PCE Price Index. Estimate 0.1%. Actual 0.1%.
• 12:30 US Personal Spending. Estimate 0.3%. Actual 0.3%.
• 12:30 US Personal Income. Estimate 0.2%. Actual 0.5%.
• 14:00 US Pending Home Sales. Estimate 1.1%. Actual 6.7%.
• 14:00 US FOMC Member William Dudley Speaks.
• 14:30 US FOMC Member Jerome Powell Speaks.
• 14:30 US Natural Gas Storage. Estimate 89B. Actual 95B.
• 23:01 British GfK Consumer Confidence. Estimate -21 points.

*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.