GBP/USD Dec. 11 – Higher After Strong Euro-zone, German Sentiment Data

GBP/USD continues to build on yesterday’s gains (Dec. 10), and has moved above the 1.61 line. The catalyst for the improvement was strong economic sentiment data out of Germany and the Euro-zone, which resulted in the dollar losing ground. These indices measure the level of optimism of institutional investors and analysts, and their views on the economy are highly respected by the markets. ZEW German Economic Sentiment, a key release, climbed to 6.9 points. This marks the first time that the index has been above the zero level since May.

Euro-zone Economic Sentiment was also solid, coming in at 7.6 points, well above the forecast of 0.1 points. This was the index’s best showing since April. A reading above the zero level indicates optimism, and the pound took advantage of these strong releases to improve against the greenback. However, the pound remains vulnerable to domestic developments, and the markets remain concerned about the health of the UK economy. Last week, Chancellor George Osborne stated that the UK would not be unable to meet its deficit reduction targets. This has raised fears that the country’s triple-A rating could be in jeopardy.

The markets are eagerly awaiting the outcome of the upcoming Federal Reserve policy-setting meeting, set for Wednesday. There is growing speculation that the Fed will introduce additional monetary easing in an effort to boost US economic growth. While the politicians in Washington continue to squabble over the fiscal cliff, the Fed may decide to intervene with an additional monetary stimulus package. Operation Twist is nearing its end, and the Fed could decide to purchase $30-40 billion a month of Treasury notes. This would be in addition to the Fed’s current program of purchasing $40 billion a month of agency mortgage-backed securities.

There is little room for the Fed to adjust interest rates due to their low levels, and the markets are anticipating that the current low rates policy will continue well into 2015. Although recent unemployment data was positive, the unemployment rate is still quite high at 7.7%, and there are other weak spots in the US economy, particularly in the manufacturing and housing sectors. These soft spots could serve as the catalyst for further Fed intervention. If the Fed does indeed intervene, this could lead to a flight from the dollar, and the pound could take advantage.

GBP/USD for Fri, Dec 11th, 2012

GBP/USD Dec 11 at 15:49 GMT
1.6108 H: 1.6122 L: 1.6069

S3 S2 S1 R1 R2 R3
1.5850 1.5930 1.5992 1.6060 1.6150 1.6247

GBP/USD Technical
GBP/USD was steady in the Asian session, consolidating at 1.6075. In the European session, the pair has moved higher, crossing above the 1.61 line. 1.6050 is the next resistance line, so there is room for further upward movement. On the downside, 1.6060 has strengthened as the pair trades at higher levels.

•Current range: 1.6060 to 1.6150
Further levels in both directions:
•Below: 16060, 1.5992, 1.5930, 1.5850, 1.5750, 1.5648, 1.56, 1.5530 and 1.5414.
•Above: 1.6150, 1.6247, 1.6343, 1.6475, and 1.66.

The pound continues to make slow but steady progress against the US dollar early in the trading week. There has been a slight increase in the open position ratio, in favor of the short positions. There is room for the pound to retract, but long positions continue to be significant, although it is interesting to note that the percentage of long positions is now the smallest for the five currency pairs listed above.

The pound has looked good over the past few days, and faces no major resistance until 1.6150. With the Federal Reserve holding a critical meeting on Wednesday, we could see the pair level off as traders and investors wait for an announcement about QE by the Fed.

GBP/USD Fundamentals
•00:01 UK RICS House Price Balance. Estimate -5%. Actual -9%.
•10:00 UK CB Leading Index. Actual -0.4%.
•10:35 UK 10-year Bond Auction. Actual 1.80%.
•13:30 US Trade Balance. Estimate -42.7B. Actual -42.2B.
•15:00 US IBD/TIPP Economic Optimism. Estimate 51.6 points. Actual 45.1 points.
•15:00 US Wholesale Inventories. Estimate +0.5%. Actual +0.6%.
(All release times are GMT)

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