GBP/USD Outlook May 12-16

GBP/USD was volatile last week. After climbing very close to the key 1.70 level, the pair dropped sharply and closed the week with slight losses, at 1.6845. This week’s highlights are Employment Change and the BOE Inflation Report. Here is an outlook for the main events moving the pound, and an updated technical analysis for GBP/USD.

The pound climbed higher early in the week, thanks to astrong Services PMI. However, a weak Manufacturing Production release weighed on currency. In the US, Services PMI and Unemployment Claims were strong, but guarded optimism from Fed chair Janet Yellen limited gains by the US dollar.

Updates:

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

1. BRC Retail Sales Monitor: Monday, 23:01. This indicator measures the change in retail sales in stores affiliated with the BRC. It helps analysts track retail sales, as the official Retail Sales publication will not be released until next week. The indicator has not impressed, posting two consecutive declines. The markets will be hoping for an improvement in the upcoming release.
2. Claimant Count Change: Wednesday, 8:30. Claimant Count Change is one of the most important economic indicators, and should be treated as a market-mover. The indicator continues to point to strong drops in unemployment, with a reading of -30.4 thousand, which was very close to the forecast. More of the same is expected in the April reading, with an estimate of -31.2 thousand. The unemployment rate dropped to 6.9% last month, well below the estimate of 7.2%. Another decline is expected, with the April estimate standing at 6.8%.
3. Average Earnings Index: Wednesday, 8:30. The BOE has maintained its QE level at 375 billion for almost two years. The markets are not expecting any change in May. This is an important gauge of consumer inflation, since higher labor costs usually are passed on to the consumer in the form of higher prices for goods and services. The indicator has been moving higher throughout 2014, and hit 1.7% last month, just shy of the estimate of 1.8%. The upward trend is expected to continue, with an estimate of 2.2%. We have not seen a reading above the 2.0% level since last July.
4. BOE Inflation Report: Wednesday, 9:30. This quarterly report is eagerly anticipated by the markets and can have a significant impact on the movement of GBP/USD. The report details the BOE’s forecast for economic growth and inflation over the next two years, and analyst will be combing through for hints as to the Bank’s future monetary policy.
5. CB Leading Index: Thursday, 9:00. The Leading Index is based on 7 economic indicators, but is considered a minor event since much of the data has been previously released. The index posted a gain of 0.4% last month, and has posted gains in all but one reading since last July.

* All times are GMT

GBP/USD Technical Analysis

GBP/USD opened the week at 1.6879. The pair climbed to a high of 1.6996. GBP/USD then reversed directions and dropped to a low of 1.6832, as support held at 1.6823 (discussed last week). The pair closed the week at 1.6845.

Live chart of GBP/USD:

Technical lines from top to bottom

We start with resistance at 1.7375. This line marked the start of a sharp pound rally in March 2006, which saw the GBP/USD push above 2.11.

Next is 1.7180, which has served in a resistance since October 2008. This is followed by 1.6990, which is protecting the key psychological level of 1.70.

1.6823 continues to be busy. The line held steady as the pound dropped sharply late in the week. This line is a weak one, and could see more action early in the week.

1.6705 continues to provide strong support.

The round number of 1.6600 follows. It has remained intact since early April, when the pound started its current rally. 1.6475 is the next support level.

1.6343 saw some activity in early February but has provided strong support since that time.

The final support line for now is 1.6247.

I remain neutral on GBP/USD.

The pound had plenty of punch last week, but showed little change despite all the movement. The 1.70 level remains in place, but came close to falling last week. Employment data has been solid in both countries, and market sentiment remains positive for both the US and UK economies, as speculation mounts as to when the Fed and BOE will make a move and raise interest rates.