GBP/USD Outlook Feb. 3-7

GBP/USD reversed directions and posted modest losses last week. The pair punched across the 1.66 line last week, but was unable to consolidate at these levels and closed the week at 1.6433. This week’s highlights are the PMI releases. Here is an outlook for the main events moving the pound, and an updated technical analysis for GBP/USD.

British GDP looked solid, rising 0.7% in December. In the US, Unemployment Claims and Pending House Sales were weak, but Advance GDP showed a strong gain. As well, the Fed went ahead with another taper of QE.

Updates:

GBP/USD graph with support and resistance lines on it. Click to enlarge:

1. Manufacturing PMI: Monday, 9:30. This index continues to look strong, although last month’s reading of 57.3 points was short of the estimate. The forecast for the January reading stands at 57.1 points.
2. Halifax HPI: Tuesday, 4th-7th. This housing inflation indicator is an important gauge of activity in the UK housing industry. The index declined by 0.6% last month after a strong gain the month before. The estimate for the January reading stands at 0.4%.
3.  Construction PMI: Wednesday, 9:30. Construction PMI continues to be a bright spot and the last two releases have been above the 60-point level. Another strong reading is expected for January, with an estimate of 61.6 points.
4. BRC Shop Price Index: Wednesday, 00:01. This indicator looks at inflation in the BRC chain of stores. We continue to see readings in negative territory, with the previous release coming in at -0.8%.
5. Services PMI: Wednesday, 9:30. This index has looked strong, but dipped below the 60-point level last month for the first time since June, coming in at 58.8 points. A similar reading is expected in the upcoming release.
6. Asset Purchase Facility: Thursday, 12:00. The BOE is expected to maintain its QE program at 375 billion, where it has been pegged since July 2010.
7. Official Bank Rate: Thursday, 12:00. The benchmark interest rate has been held at 0.50% for the past four years. With the UK economy producing strong data, there has been speculation about a rate hike, although we’re unlikely to see one this week. If economic indicators, particularly employment numbers, continue to improve, the BOE may be forced to act or risk an overheated economy.
8. Manufacturing Production: Friday, 9:30. This key release disappointed last month, posting a flat 0.0%, well below the estimate. The markets are expecting better news from the January release, with the estimate standing at 0.6%.
9. Trade Balance: Friday, 9:30. The UK continues to post trade deficits. The previous release saw a deficit of -9.4 billion pounds and little change is expected in the upcoming reading.
10. NIESR GDP Estimate: Friday, 15:00. This indicator helps analysts track GDP on a monthly basis, as official GDP is released on a quarterly basis. The indicator has been steady and came in last month at 0.7%.

* All times are GMT

GBP/USD Technical Analysis

GBP/USD opened the week at 1.6492 and quickly jumped to high of 1.6624, breaking above resistance at 1.6600 (discussed last week). The pair then lost ground for the remainder of the week, dropping to a low of 1.6426. GBP/USD closed the week at 1.6433.

Live chart of GBP/USD:

Technical lines from top to bottom

We start with resistance at 1.6990, which is protecting the key 1.70 level. This line has held firm since October 2008.

Next, there is resistance at 1.6705, which was last tested in May 2011.  This is followed by the round number of 1.6600, which was briefly breached early in the week, but remains intact.

1.6475 continues to be active and was breached again last week. The line has reverted to a resistance role and is a weak line which could see further activity early in the week.

This is followed by 1.6343, which continues to provide support. It is not a strong line and could face pressure if the pound weakens.

1.6247 is providing the pair with strong support. This was a key resistance line in October and November 2012.

1.6125 is the next support level. This line has held steady since late November.

The round number of 1.60, a key psychological barrier, is providing the pair with strong support.

The final support level for now is 1.5893, which last saw action in November.

I am neutral on GBP/USD.

The British economy continues to improve, to such an extent that the BOE finds itself under pressure to raise rates, although no e action is expected this week. In the US, a second taper by the Fed was a vote of confidence in the US economy and such positive sentiment could provide a boost to the dollar. Much will depend on this week’s three British PMIs – if they fail to meet their estimates, the pound could lose ground.