Will GBPUSD Rise Short-Term?

Includes: FXB, UDN, UUP
by: Angelo Airaghi

The US dollar is briefly rebounding from the decline that started in June. Nonetheless, the trend is staying bearish and should persist until year's end. GBPUSD, in particular, appears to be leading the way. A breakout above 1.6195 could quickly target 1.6295/1.6590.

GBPUSD: Technically strong.

After declining for three consecutive quarters, in the U.K., the GDP rose 1% on a quarter to quarter basis during the third quarter (Q3) of the year. Results were probably influenced by the Olympics. In fact, the biggest contributors to growth were from the government and sports activities. Construction declined 2.5%, on the top of a fall of 3% in the second quarter of the year. Output was boosted by the manufacturing sector, which rose 1.1% in Q3.

Technically, there is a divergence between the price of GBPUSD and the RSI indicator on the daily and weekly charts. A breakout above 1.6195 could quickly target 1.6295/1.6590. It is true that November is not a good month for the British pound. Nonetheless, the continuation pattern, within the medium-term uptrend, seems to anticipate a new move up short-term.

US: Deficit's reduction is a priority.

In effect, the US dollar is staying capped by the huge deficit for now. The Congressional Budget Office (CBO) expects the debt/GDP ratio to rise from about 70% to almost 95% in 2022. The next president of the United States should reduce it by at least USD 3 trillion over the next decade to avoid another ratings downgrade. Will Democrats and Republicans find common ground on these terms? The answer is probably yes, as the costs will be too high if no-action takes place, considering also the weak economic conditions.

The GDP is near 2.0%, supported mainly by the housing sector. Homes under construction manifested the sharpest pace of growth in three decades. New highs in price should be seen within three to five years from the bottom (2010), if history repeats itself. Business investment, which supported growth for two years until the end of 2011 is, on the contrary, stagnating and declined 1.3% in the third quarter of this year. Uncertainty over the so-called "fiscal cliff" scenario is already weighing on growth. Equipment and software investments showed the poorest performance since the recession in 2009.

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