GBP/USD - Sharp Losses As U.S. Inflation Data Improves

|
 |  Includes: FXB, UDN, UUP
by: Dean Popplewell

By Kenny Fisher

The British pound has sustained sharp losses on Wednesday, as the US dollar enjoys broad strength against its major rivals. In Wednesday's North American session, the pound is trading in the mid-1.63 range. The pound has slumped badly, losing 150 points against the dollar since the start of the week. In economic news, the sole British release, CB Leading Index, showed little change, posting a gain of 0.5%. In the US, PPI rebounded in December with a gain of 0.4%, just shy of the estimate. The Empire State Manufacturing Index looked very sharp jumping to a twenty-month high of 12.5 points.

US inflation numbers were solid on Wednesday. PPI, a key release, rebounded from a decline in November and posted a gain of 0.4%, just short of the estimate of 0.5%. Core PPI improved to 0.3%, up from 0.1% a month earlier. The estimate stood at 0.1%. The US dollar responded positively to the figures and is broadly higher against the major currencies, and the pound continues to lose ground.

Earlier on Tuesday, the UK released a host of December inflation indicators, and most of the releases were very close to the estimates. CPI, the most important inflation indicator, came in at 2.0%, almost unchanged from 2.1% in November. The estimate stood at 2.1%. The reading dovetails with the Bank of England's inflation target of 2.0%. CPI has been dropping in recent readings, and this lessens the pressure on the Bank of England to raise interest hikes in response to the improving UK economy.

US employment numbers started 2014 on a positive note, but Friday’s Non-Farm Payrolls was dismal, posting its lowest gain since May 2012. The key employment indicator dropped to just 74 thousand, down from 203 thousand a month earlier. This was nowhere near the estimate of 196 thousand. Although the unemployment rate dropped to 6.7%, this was due to a drop in the participation rate, which fell to 62.8%, its lowest level since 1978. This figure points to a worrying trend of a jobless US recovery.

Last week's disappointing Non-Farm Payrolls report may have created some concern in the markets, but is unlikely to change the Federal Reserve's path of tapering QE, which it started just this month. In December, outgoing Fed chair Bernard Bernanke strong hinted that the Fed planned to wind up QE by the end of 2014, reducing the asset-purchase program by increments of $10 billion at each Fed policy meeting over the course of the year. The Fed next meets for a policy meeting on January 28, and the question is will the Fed reduce QE by another $10 billion, down to $65 billion each month. Most analysts feel that one bad employment report will not affect the taper schedule and we will see a reduction in QE at the next policy meeting.

GBP/USD for Wednesday, January 15, 2014

Forex Rate Graph 21/1/13

GBP/USD January 15 at 16:15 GMT

GBP/USD 1.6356 H: 1.6438 L: 1.6323

GBP/USD Technical

S3 S2 S1 R1 R2 R3
1.6125 1.6231 1.6329 1.6416 1.6549 1.6705
Click to enlarge
  • GBP/USD has posted sharp losses in Wednesday trading. The pair tumbled below the 1.64 line in the European session but has steadied in North American trading.
  • 1.6416 has reverted back to a resistance line as the pound trades at lower levels. This is followed by stronger resistance at 1.6549.
  • 1.6329 is providing support. This is followed by a support level at 1.6231.
  • Current range: 1.6329 to 1.6416

Further levels in both directions:

  • Below: 1.6329, 1.6231, 1.6125 and 1.6000
  • Above: 1.6416, 1.6549, 1.6705, 1.6964 and 1.7182

OANDA's Open Positions Ratio

GBP/USD ratio is pointing to gains in short positions in Wednesday trading, continuing the trend we have seen all week long. This is reflected in the pair's movement, as the pound has sustained sharp losses against the dollar. A large majority of the open positions in the GBP/USD ratio are short, indicative of a trader bias towards the dollar continuing to move higher.

The pound has lost close to a cent in Wednesday trading, following sharp losses in the European session. The currency has steadied early in the North American session.

GBP/USD Fundamentals

  • 13:30 US PPI. Estimate 0.5%. Actual 0.4%.
  • 13:30 US Core PPI. Estimate 0.1%. Actual 0.3%.
  • 13:30 US Empire State Manufacturing Index. Estimate 3.2 points. Actual 12.5 points.
  • 15:30 US Crude Oil Inventories. Estimate -0.7M.

*Key releases are highlighted in bold

*All release times are GMT

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.