GBP/USD – Pound Continues to Drop as 1.60 Under Strong Pressure

GBP/USD is dropping, as yesterday’s (January 8th) downward move continues. The pound is perilously close to the important 1.60 line, and is trading at levels not seen since early December. The markets are awaiting Thursday’s rate announcements by the European Central Bank and the Bank of England, and the BOE will also release its Asset Purchase Facility figure. In the UK, the BRC Price Index showed no change, and the important Trade Balance release matched the market forecast. It is another quiet day in the US, with only two releases – Crude Oil Inventories and the 10-year Bond Auction. In a major announcement on Tuesday, Japan announced that it would purchase bonds from the European Stability Mechanism. The Japanese government said that the move would increase stability in the Eurozone and help stabilize the yen.

The pound has lost more ground as the markets keep a close eye on tomorrow’s announcements from the UK and European central banks. Both central banks will announce their benchmark interest rates tomorrow, while the BOE will also announce its Asset Purchase Facility (QE) amount. Currently, the ECB rate stands at 0.75%, the BOE rate is pegged at 0.50%, and QE is at 375 billion pounds. Although the markets are not expecting changes in any of these key releases, there is an underlying concern that the ECB or the BOE could hint at rate cuts to take place later in the year.

There was an important development as Japanese Finance Minister Taro Aso stated on Tuesday that Japan plans to purchase bonds from the European Stability Mechanism, which is the Eurozone’s bailout fund. The ECB was delighted with the news, and said that the ESM would begin issuing immediately. This will be the first time that the ESM has issued securities since it was formed last October. Finance Minister Aso said that the move will help bring more stability to the Eurozone, which in turn will also help stabilize the yen and other currencies.

Clearly, the Japanese government’s primary motivation is not to save the Euro-zone. The purchase of ESM bonds with Japanese yen will allow Prime Minister Shinzo Abe to continue to weaken the Japanese currency (and strengthen the euro at the same time) without sustaining further criticism from the US and other countries, who are worried about the aggressive economic stance of the new government and its call for unlimited easing by the Bank of Japan. The new Japanese government, which won the elections in December, is determined to stamp out deflation, which has been a long-term problem for the sluggish Japanese economy.

In economic news, the UK BRC Shop Price Index rose 1.5%, unchanged from the November reading. The deficit narrowed slightly to 9.2 billion pounds, just shy of the -9.1B estimate. US consumer indicators painted a mixed picture. Economic Optimism rose to 46.5 points, which was a notch above the estimate of 46.3 points. This figure is a cause for concern, as it is the third consecutive reading under the 50 point threshold, indicating that consumers continue to be somewhat pessimistic about the US economy. At the same time, Consumer Credit jumped to a 3-month high, climbing to 16.0 billion dollars. This easily beat the estimate of 12.9B, and points to stronger consumer spending and confidence. In the US, Crude Oil Inventories came in at 1.3M, above the forecast of 0.9M. The other US release is the 10-year Bond Auction.

GBP/USD for Wednesday, Jan 9, 2013

GBP/USD Jan 9 at 15:25 GMT
1.6013 H: 1.6075 L: 1.5993

GBP/USD Technical

GBP/USD continues to weaken in Wednesday’s trading, but the immediate support and resistance lines (S1 and R1 above) remain intact. The pair briefly dipped below the critical 1.60 line in late European trading, although it has crossed back above it. The pair is receiving weak support at 1.5975. This line could be tested if the pair can sustain a move below 1.60. There is stronger resistance at 1.5850. On the upside, 1.6062 is providing strong resistance. This line has strengthened as the pair trades close to the 160 line.

• Current range: 1.5975 to 1.6062.

Further levels in both directions:
• Below: 1.5975, 1.5930, 1.5850, 1.5750 and 1.5468.
• Above: 1.6062, 1.6135, 1.6212, 1.6273, 1.6341 and 1.6471.

OANDA Open Positions Ratios

The GBP/USD ratio strongly favors short positions, indicating trader sentiment favors the pound losing ground against the US dollar. This bias has been firmly vindicated over the past two days. as the pound has taken a tumble, losing over one full cent against the greenback. Will the downward trend continue?
GBP/USD continues to lose ground and briefly dropped below the critical 1.60 line earlier on Wednesday. If the pair can again breach 1.60 and sustain a downward drive, look for the pound to continue to drop against the dollar.

GBP/USD Fundamentals

• 00:01 UK BRC Shop Price Index. Actual 1.5%
• 15:30 US Crude Oil Inventories. Estimate. 0.9M. Actual 1.3M
• 18:00 US 10-year Bond Auction

*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.