GBP/USD – Pound Unsteady as Markets Cast Nervous Eye on Italy

The British pound continues to show some fluctuation against the US dollar, as the markets digest the unwelcome news of an inconclusive vote in Italian parliamentary elections. With no party winning a majority, it will be tricky task forming a workable government. The prospect of extended political uncertainty in the Eurozone’s third largest economy is making the markets jittery, and we could be in for a period of volatility until the political puzzle gets sorted out. In the US, New Home Sales and Consumer Confidence both sparkled, easily beating their estimates. The markets will be monitoring testimony by Fed chair Bernard Bernanke, who is testifying before the US Senate Banking Committee. In the UK, CBI Realized Sales was a major disappointment, falling way below market expectations.

Italian elections have well-earned reputation for being raucous and colorful events, and the results of this election certainly didn’t disappoint in that regard. The 5-Star Movement, which was largely a protest movement run by Beppe Grillo, a former comic, shocked pundits by winning the most votes. Grillo’s party now becomes the key to any chance of forming a coalition. The Center-left bloc, headed by Pier Luigi Bersani, won a majority in the lower house of parliament, but there was no clear winner in the upper house. This leaves the country in a political stalement, as any coalition cannot govern without forging a majority in both houses. Prime Minister Monti’s centrist bloc fared poorly at the polls, reflecting widespread voter dissatisfaction with the former Prime Minister’s severe austerity measures. The deadlock represented a worst-case scenario for the markets, which is concerned that political instability in Italy could affect the entire Eurozone.

In the UK, BOE members testified on inflation and the UK economic outlook before Parliament’s Treasury Committee on Tuesday. The BOE’s recent Inflation Report was pessimistic, and is one of the reasons that the pound has been falling. The report stated that the economic recovery will be slow, and inflation will remain higher than the BOE’s target at least until 2016. There is more talk of the central bank injecting more QE into the economy, which would be a pound-negative event. In economic news, CBI Realized Sales fell all the way to 8 points, well below the estimate of 15. The news was much better out of the US, New Home Sales and Consumer Confidence both looked very sharp. Consumer Confidence rebounded nicely, climbing to 69.6 points. This crushed the estimate of 60.8. Not to outdone, New Home Sales climbed to 437 thousand, its best showing since May 2010. The estimate stood at 381 thousand. The Richmond Manufacturing Index, which had a dismal reading in January, climbed to 6 points, easily exceeding the forecast of -4. The markets will be hoping that the positive momentum continues into Wednesday, as the US releases key manufacturing and housing data.

The US Federal Reserve will again be in the market spotlight on Tuesday, as Federal Reserve Chair Bernanke testifies before the US Senate Banking Committee. Recently, the Fed released the minutes of its most recent FOMC meeting. The minutes indicated that policymakers had discussed slowing or even stopping the current round of QE before the US employment situation improves, which was an about-face in the Fed’s stance. Previously, the Federal Reserve had stated that it would not terminate the current round of QE before the US unemployment rate fell to 6.5%. Bernanke will likely be questioned about this issue at the hearing.

GBP/USD for Tuesday, Feb 26, 2013

GBP/USD Feb 26 at 17:30 GMT

1.5135 H: 1.5219 L: 1.5114

GBP/USD Technical

The pound remains under pressure, as it trades in the mid-1.51 range. The pair is testing the line of 1.5138, which was birefly breached earlier. There is stronger resistance at 1.5203. On the downside, 1.5053 is the next line of support. This is followed by support at 1.4988, which has held firm since June 2010.

• Current range: 1.5053 to 1.5138

Further levels in both directions:

• Below: 1.5053, 1.4988, 1.4880 and 1.4818
• Above: 1.5138, 1.5203, 1.5309, 1.5395, 1.5481 and 1.5565

OANDA’s Open Positions Ratios

The GBP/USD ratio has changed directions, and is currently moving towards long positions. This is not reflected in the current movement of the pair, but could signal that a correction in an upward direction may not be far away. With a solid majority of positions being long, trader bias is in favor of the pound rebounding against the greenback.

The pound continues to struggle to find its footing, and the Moody’s downgrade late last week has not helped matters. Some analysts are talking about a sub-1.50 pound, and we could see further weakness from the British currency if economic releases don’t point to some improvement in the long-suffering UK economy.

GBP/USD Fundamentals

• 9:30 Bank of England Governor Mervyn King Speaks in Tokyo.
• 15:30 British Inflation Report Hearings Before Parliament’s Treasury Committee.
• 11:00 CBI Realized Sales. Estimate 15 points. Actual 8 points.
• 18:30 Bank of England MPC Member Paul Fisher Speaks.
• 14:00 US S&P/CS Composite-20 HPI. Estimate 6.7%. Actual 6.8%.
• 14:00 US HPI. Estimate 0.6%. Actual 0.6%.
• 15:00 US CB Consumer Confidence. Estimate 60.8 points. Actual 69.6 points.
• 15:00 US Fed Chairman Bernard Bernanke Speaks. Bernanke will testify on the Semiannual Monetary Policy Report before the Senate Banking Committee.
• 15:00 US New Home Sales. Estimate 381K. Actual 437K.
• 15:00 US Richmond Manufacturing Index. Estimate -4 points. Actual 6 points.

*Key releases are highlighted in bold

*All release times are GMT]

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