GBP/USD – Volatile on Fiscal Cliff worries, Italian PM Resignation

GBP/USD has been marked by strong volatility in Monday trading, as the pair broke through the 1.62 line, only to cough up most of these gains later in the day. On Friday, both UK and US key data was mixed. The markets continue to eye the fiscal cliff crisis, as optimism is fading that an agreement can be reached prior to the end of the year. In Europe, Italian Prime Minister Mario Monti resigned, and Italians will again go to the polls to choose a new government, with elections likely in February 2013. There are no scheduled releases out of the UK or the US on Monday, with the markets winding down for the Christmas holiday.
The previous trading week wrapped up with a mixed bag of key releases from both the UK and the US.

In the UK, the Current Account deficit narrowed to -12.8 billion pounds, which was well below forecast. However, the Public Sector Net Borrowing deficit ballooned to 15.8 billion pounds, a six-month high. In the US, Core Durable Goods Orders posted an excellent gain of 1.6%, surprising the markets which had expected a decline of 0.2%. This marked the third straight reading that the markets have seriously underestimated this key manufacturing reading. On the downside Revised UoM Consumer Sentiment plunged to a four-month low, posting a reading of 72.9 points.

The markets are increasingly jittery as the fiscal cliff clock continues to tick down before a series of automatic tax hikes and spending cuts kick in on January 1, 2013. With Republicans and Democrats far apart on how to tackle spending cuts and tax hikes, the fiscal cliff negotiations in Congress are gridlocked, as each side continues to attack and blame the other for the impasse. There were some red faces on the Republican side last week, as Republican House Leader John Boehner threatened to pass a “Plan B” that would have avoided tax hikes for all Americans earning less than $1 million per year. In the end the motion was withdrawn to due lack of support on the Republican side.

The Republicans took a gamble on Plan B, hoping that it would put the ball back in the Democrat’s court, and embarrass the White House if it went ahead and vetoed the motion. In the end, it was House Leader Boehner who had to wipe egg off his face, as Plan B turned out to be a futile political maneuver. Meanwhile, Congress is adjourned until December 27th, just days before the fiscal cliff kicks in. Will the lawmakers get their act together this week, or will we “go down the cliff” into 2013? The crisis could have a major impact on the markets, and GBP/USD could continue to fluctuate sharply if there are developments in the crisis this week.

The markets are also monitoring political developments in Italy, where Prime Minister Mario Monti announced his resignation over the weekend. Monti has headed the government for just 13 months, but is widely credited for helping stabilize the Italian economy during the difficult debt crisis. Monti tendered in his resignation after parliament approved the 2013 budget. Political and financial leaders in Europe would like him to run in the upcoming elections, but in Italy, the two main parties and a majority of Italians, unhappy with his austerity measures, are not supportive of another run for office by Monti. The markets will continue to keep a close eye on developments in Rome, as Italy continues to struggle with a weak economy and huge public debt.

GBP/USD for Monday, Dec 24, 2012

GBP/USD Dec 24 at 16:00 GMT

1.6121 H: 1.6206 L: 1.6119

GBP/USD Technical

GBP/USD is showing sharp volatility as it broke through the 1.62 line. However, it was unable to sustain this rise and retracted to the low 1.61 range. The pair is close to the resistance line at 1.6135, and this line could see more activity in the North American session. On the downside, 1.6062 continues to provide strong support, and has not been tested since December 10.
• Current range: 1.6062 to 1.6135
Further levels in both directions:
• Below: 1.6062, 1.5975, 1.5940, 1.5825 and 1.5775.
• Above: 1.6135, 1.6212, 1.6273, 1.6341, 1.6475 and 1.66.

OANDA Open Positions Ratios
GBP/USD has started the trading week with sharp volatility, which is unusual during the final trading week of the year. The ratio continues to be strongly biased toward short positions, as trader sentiment is expecting the pound to lose ground. Look for the ratio between long and short positions to change if the pair continues to make sharp moves.
The fiscal cliff crisis in Washington continues to dominate economic news, and could have a major impact on GBP/USD. The pound stands to benefit if there is any progress in Congress. Conversely, if the impasse continues into January, the dollar will likely pick up ground, as nervous investors flock to the safety of the US dollar.

GBP/USD Fundamentals

• There are no scheduled releases out of the UK or US on Monday.

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