GBP/USD – Pound’s Plunge Continues

The US dollar has taken a beating from the pound in recent weeks, but GBP/USD has reversed directions and is losing ground. The dollar has now gained almost two cents since Thursday, and is trading in the mid-1.60 range in Friday’s European session. There is very little action on Friday, with no economic releases out of the UK or the US. Later in the day, we’ll hear from FOMC members Dudley and Stein. It’s Day 4 of the US shutdown, with no end in sight to the crisis.

“Stalemate” is the word of the day in Washington, as the shutdown which has paralyzed the US government continues into its fourth day. Democrats and Republicans are entrenched in their positions, as each side blames the other for the deadlock. Republicans want a commitment from the Democrats to delay Obamacare before passing a budget, while the Democrats say that there can be no discussions on the heath care legislation before a budget is passed. With the government lacking funds to operate, it has been forced to close non-essential services across the country and send almost a million government workers home. Pressure on both sides to show some flexibility is growing, but so far no progress has been made as the deadlock drags on.

The government shutdown remains in the spotlight, but there is a far more serious crisis is lying just around the corner – the debt ceiling. The US has accumulated a debt of $16.7 trillion, and will run out of funds to service the debt by October 17, unless Congress authorizes raising the debt ceiling. Otherwise, the US could potentially default on its obligations, which could cause chaos in the domestic and international financial markets. There was some positive news on Thursday, as House Speaker John Boehner (Republican) apparently told his party that he would allow the Democrats to raise the debt limit. This would avoid another nasty fight in Congress, which is the last thing that the economy and the US dollar need right now.

Most experts predicted that the Federal Reserve would taper QE in September, and the markets were caught by surprise when the Fed balked and opted to maintain the levels of the bond-buying program at $85 billion/mth. However, with the budget deadlock in Washington, which has shut down the government, as well as growing fears about a debt ceiling crisis, expectations for a QE reduction have quickly dissipated. Even if both of these issues were to be resolved quickly, the distortions and delays in key economic data will make it difficult for the Fed to have an accurate, up-to-date picture of the US economy. This will likely rule out any decision to taper QE before the end of the year.

After a strong run by British PMIs in recent months, have these key indicators run out of steam? Earlier in the week, Manufacturing and Services PMIs both posted declines and missed their estimates. On Thursday, Services PMI came in at 60.3 points, down a bit from the previous reading of 60.5 points. The estimate stood at 60.4 points. All three of this week’s PMIs posted strong readings, but the markets could get nervous if additional UK releases point lower. The pound is in a spot of trouble, but is still trading at high levels against the dollar.

GBP/USD for Friday, October 4, 2013

GBP/USD October 4 at 12:20 GMT

GBP/USD 1.6052 H: 1.6178 L: 1.6033

GBP/USD Technical

• GBP/USD continues to drop in Friday trading. The pair has dropped below the 1.61 line in the European session and continues to weaken.
• The pair is receiving support at the round number of 1.6000. This line has weakened as the pound has lost ground, and could face pressure during the day. This is followed by strong support at 1.5877.
• On the upside, the pair is facing resistance at 1.6125. This is followed by resistance at 1.6231.
• Current range: 1.6000 to 1.6125

Further levels in both directions:

• Below: 1.6000, 1.5877, 1.5756, 1.5645 and 1.5527
• Above: 1.6125, 1.6231, 1.6300, 1.6421, 1.6504 and 1.6573

OANDA’s Open Positions Ratio

The GBP/USD ratio continues to point to movement towards short positions in Friday trading. This is not reflected in the pair’s current movement, as the pound continues to lose ground. The ratio is comprised of a majority of short positions, which reflects a bias in favor of the US dollar continuing to post gains at the expense of the pound.

The US dollar continues to post gains against the pound, and the key 1.60 level is within striking distance. If there are no dramatic developments out of Capitol Hill today, we could see GBP/USD continue to trade above the 1.60 line.

GBP/USD Fundamentals

• 13:15 US FOMC Member William Dudley Speaks.
• 13:30 US FOMC Member Jeremy Stein Speaks.

*Key releases are highlighted in bold

*All release times are GMT

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