GBP/USD – Pound Subdued, US GDP Looms

GBP/USD has edged lower in the Wednesday session. Currently, the pair is trading slightly below the 1.24 line. On the release front, the UK deficit rose to GBP 12.2 billion, higher than the forecast of 11.5 billion. In the US, Existing Home Sales was unexpectedly strong, climbing to 5.61 million. Thursday will be busy, as the US releases three key events – Core Durable Goods Orders, Final GDP and unemployment claims.

It’s been a rough and tumble ride for the pound in the fourth quarter, as GBP/USD has slipped as much as 4.9% during since October 1. The pound took another hit after the Federal Reserve raised rates last week. At the same time, British releases have been respectable in Q4, as the economy has defied the doomsayers who forecast disaster after the Brexit referendum vote in June. On Tuesday, CBI Realized Sales, which measures retail sales volumes, impressed with reading of 35 points. This marked the fastest pace of retail sales growth since September 2015.

December seems to be that special time of year for the Federal Reserve. When the Federal Reserve raised interest rates in December 2015, the Fed confidently predicted a series of rate hikes in 2016 in order to keep a hot US economy in check. However, the Fed remained on the sidelines throughout 2016 and refrained from any rate hikes until last week. There were several false starts along the way, as expectations that the Fed would raise rates earlier in 2016 failed to materialize. This led to sharp criticism of Janet Yellen for failing to provide a clear monetary policy. Yellen seems to have been keenly aware of this, as the Fed did everything short of buying advertisements in daily newspapers to get out the message that it planned to raise rates in December. Indeed, a rate hike was priced in as high as 100% by some analysts. Yellen deserves full marks for sending a clear message to the markets.

With the Fed finally pressing the rate trigger last week, what can we expect from Janet Yellen & Co.? In September, Fed officials predicted two rate hikes in 2017, but the Fed is now projecting three or even four hikes next year. However, projections need to be adjusted to economic conditions, and the markets will understandably be somewhat skeptical about Fed rate forecasts. The upcoming Trump presidency is likely to shake things up in Washington, but Trump’s economic stance remains unclear. Still, there is growing talk about ‘Trumpflation’, with the markets predicting that Trump’s policies will increase inflation levels, which have been persistently weak. If inflation levels do heat up, there will be pressure on the Fed to step in and raise interest rates.

GBP/USD Fundamentals

Wednesday (December 21)

• 4:30 British Public Sector Net Borrowing. Estimate 11.5B. Actual 12.2B
• 10:00 US Existing Home Sales. Estimate 5.52M. Actual 5.61M
• 10:30 US Crude Oil Inventories. Estimate -2.4M
• 19:01 British GfK Consumer Confidence. Estimate -8 points

Thursday (December 22)

• 8:30 US Core Durable Goods Orders. Estimate 0.2%
• 8:30 US Final GDP. Estimate 3.3%
• 8:30 US Unemployment Claims. Estimate 255K

*All release times are EST

* Key events are in bold

GBP/USD for Wednesday, December 21, 2016

GBP/USD December 21 at 10:30 EST

Open: 1.2363 High: 1.2389 Low: 1.2322 Close: 1.2378

GBP/USD Technical

• GBP/USD was flat in the Asian session. The pair posted slight losses in European trade but recovered. The pair has posted slight gains in the North American session
• 1.2351 was tested earlier in support and is a weak line
• 1.2471 is the next resistance line

Further levels in both directions:

• Below: 1.2351, 1.2272, 1.2111 and 1.1943
• Above: 1.2471, 1.2620 and 1.2778
• Current range: 1.2351 to 1.2471

OANDA’s Open Positions Ratio

GBP/USD ratio remains unchanged this week. Currently, long positions have a majority (57%), indicative of trader bias towards GBP/USD reversing directions and moving upwards.

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.