GBP/USD – Pound Losing Ground After Weak Euro Data

The British pound has lost ground in Tuesday’s trading, and has given up the gains it made the previous day. The pound reacted negatively to a host of weak data out of the Eurozone, as employment numbers remained weak and German data disappointed. In a major announcement, Japan announced that it would purchase bonds from the European Stability Mechanism (ESM) starting on Tuesday. The Japanese government said that the move would increase stability in the Eurozone and help stabilize the yen.

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. The first debt auction will be on Tuesday, with three-month notes being offered with a value of about 2 billion euros. 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. Japan has already purchased about 7 billion euros from the European Financial Stability Facility (EFSF).

Both bailout funds will run in parallel until the EFSF is phased out later in 2013. 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.

Taking a look at fundamentals, the UK BRC Retail Sales Monitor rose 0.4%, slightly lower than the 0.3% increase in the previous reading. The data is not as comprehensive as the official UK Retail Sales release, since it only covers merchants affiliated with the British Retail Consortium. The pound sagged after some disappointing Eurozone releases. The Eurozone Unemployment Rate remained at a very high 11.8%. German Trade Balance surplus came in at 14.6B, well below the estimate of 15.4B. Eurozone Retail Sales and German Factory Orders also fell below the estimate. In the US, Economic Optimism came in very close to the estimate. Today’s other release, Consumer Credit, looked sharp in December, but the markets are expecting a decline.

Back in the UK, Net Lending to Individuals looked weak, falling well below the estimate. This underscores a worrying trend of decreased bank lending in the UK. This negative development is also affecting banks on the Continent, which have been hard hit by the debt crisis. This dire situation has led to a sharp drop in the number of loans by Eurozone banks to private households. The ECB is clearly worried, and blames this trend on weak confidence in the Eurozone economy and increased aversion to risk. Analysts expect credit demand to continue to be weak, and note that the ECB’s decision to cut its deposit rate to zero percent has not boosted bank lending to the private sector. On the flip side, the Eurozone M3 indicator, which measures the amount of money in circulation, jumped by 3.8% in November. This could be an indication that more inflation is on the way in 2013, which could affect interest rates and the value of the euro.

GBP/USD for Tuesday, Jan 8, 2013

GBP/USD Jan 8 at 14:35 GMT

1.6035 H: 1.6122 L: 1.6035

GBP/USD Technical

GBP/USD continues to weaken in Tuesday’s trading, and is approaching the critical 1.60 level. There is support at 1.5975, followed by 1.5850. On the upside, 1.6062 is providing resistance. This line is strengthening as the pair trades at lower levels.

• 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, 1.6471 and 1.66.

OANDA Open Positions Ratios

The GBP has stabilized after the recent increase in the long positions component. Most positions remain short, which is an indication that trader sentiment remains biased in favor of the pound losing ground against the dollar. This expectation has been vindicated in today’s trading, with the pound posting losses against the greenback.

GBP/USD has reversed direction in Tuesday’s trading, and continues to lose ground. We could see the pound approach the critical 1.60 line later in the day.

GBP/USD Fundamentals

• 00:00 BRC Retail Sales Indicator. Actual 0.3%.
• 15:00 US IBD/TIPP Economic Optimism. Estimate 46.3 points. Actual 46.5 points.
• 20:00 US Consumer Credit. Estimate 12.9B

*Key releases are highlighted in bold
*All release times are GMT

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