Market Overview

GBP/USD Dec. 17 – Breaks 1.62 line as Rally Continues

GBP/USD started the new trading week right where it left off, posting more gains against the greenback. The pair shrugged off the news that the S&P credit ratings agency had lowered its rating on the UK from stable to negative. In its announcement, S&P warned that there is a one-in-three chance that Britain will lose its triple-A credit rating in the next two years. The move underscores growing market concern over the anemic UK economy. Although GBP/USD is moving higher and has crossed above 1.62, EUR/GBP was lower following the S&P release.

The dollar continues to lose ground following Federal Reserve's announcement that it would implement another round of quantitative easing (QE4), and purchase an additional 45 billion dollars per month in Treasury holdings in order to boost the US economy. Under Q4, the Fed will purchase 45 billion dollars per month in Treasury holdings. This is in addition to the $40 billion that the Fed has been buying in mortgage backed securities under Q3. Operation Twist, in which the Fed swapped short-term Treasuries for longer term U.S. government debt, will be phased out at the end of 2012. The dollar was broadly lower against most of the major currencies last week following the Fed's announcement that it would introduce further monetary easing.

Meanwhile, the gridlock over the fiscal cliff shows no sign in letting up. The Republicans have retreated on their demand not to raise taxes, but want a hike to only affect those earning more than $1 million. The Democrats are insisting on tax hikes over those earning over $250,000. The negotiations are continuing, with both sides still far apart on the issues of tax increases and spending cuts. There is mounting pressure on the two sides to reach an agreement, since if no action is taken, the combination of higher taxes and a cut in federal spending, which would occur automatically at the end of 2012, could push the fragile US economy into recession. In the end, some compromise or stop-gap measure is likely to be reached on Capitol Hill before the end of the year. There are just a few economic releases on Monday.

In the UK, Rightmove HPI declined for the second straight month, disappointing the markets. The US will release the Empire State Manufacturing Index later today. The markets are hoping that the index can rebound after a host of very weak releases.

GBP/USD for Mon, Dec 17, 2012

GBP/USD Dec 17 at 13:15 GMT
1.6208 H: 1.6216 L: 1.6174

S3 S2 S1 R1 R2 R3
1.5975 1.6020 1.6135 1.6212 1.63 1.6340

GBP/USD Technical
GBP/USD continues to push higher against the dollar, and is testing resistance at 1.6212. The next line of resistance is at the round number of 1.63. On the downside, 1.6135 has strengthened as the pair trades at higher levels.
• Current range: 1.6135 to 1.6212
Further levels in both directions:
• Below: 1.6135, 1.6020, 1.5975, 1.5940, 1.5825 and 1.5775.
• Above: 1.6212, 1.6341, 1.6475 and 1.66.

OANDA Open Positions Ratios
GBP/USD bias continues strongly in favor of the short positions. A potential downturn following last week's gains has not materialized, as the pair continues to move higher. There is room for the pound to make further gains.

The pound took full advantage of the Federal Reserve announcement to increase monetary easing, and managed to shrug off the S&P downgrade to UK government debt. GBP/USD is on a strong roll, and this upward trend could well continue.

GBP/USD Fundamentals
• Sunday, 11:22 Rightmove HPI. Actual -3.3%.
• Monday, 13:30 US Empire State Manufacturing Index. Estimate -0.7 points.
• Monday, 14:00 US TIC Long-term Purchases. Estimate 24.3B.
• Monday, 16:00 US FOMC Member Jeremy Stein Speaks.
• Monday, 18:00 US FOMC Member Jeffrey Lacker Speaks
*Key releases are highlighted in bold
*All release times are GMT

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