GBP/USD – Down Sharply as Dollar Rebounds

The British pound was down sharply, as the US dollar bounced back from its broad weakness following the fiscal cliff agreement. After some impressive gains earlier in the week, the pound has slumped, losing close to a cent during Thursday's European session.
In economic releases, UK Construction PMI, a key release failed to meet the forecast. In the US, employment data was mixed. Unemployment Claims was higher than the estimate, but ADP Non-Farm Employment Change looked very sharp. Today's other highlight out of the US is the minutes of the most recent FOMC policy meeting.

In a last-ditch effort, Congress pulled out all the stops and managed to cobble together a last minute agreement to avert the crisis. Without a deal, there was a danger that the US economy would slip into recession into 2013, due to a combination of tax increases and spending cuts. The agreement permanently extends tax cuts for all earners up to $450,000 and retains other tax breaks for individuals and businesses. Although both the Senate and House of Representatives passed the deal by large margins, although there was plenty of grumbling on both sides of the political divide- perhaps proof that the deal reached was a true compromise.

Most notably, the agreement fails to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and action will have to be taken to avoid a default on the country's debt. Republicans, who were unhappy that the fiscal cliff agreement did not address spending cuts, are expected to demand cuts in programs such as Medicare and Social Security. They will face stiff resistance from the Democrats, who vehemently oppose any reductions in these programs, and favor raising the debt ceiling, which is what Congress agreed to in 2011.

President Obama has stated he will not negotiate over the debt ceiling, but some kind of agreement will likely be reached between the two sides. The IMF has also weighed in on the matter, saying that the fiscal agreement is not enough, and that the US must take further action to deal with its long-term debt problem. The IMF call for Congress to quickly approve a comprehensive plan which to “ensure both higher revenues and containment of entitlement spending over the medium term”.

As we begin 2013, a look at recent key US releases points to a mixed and confusing picture. Employment numbers improved in December, and the markets will be hoping for a repeat from Thursday's economic releases. However, consumer confidence fell badly last month, indicating that consumers still lack confidence in the economic recovery and are wary to open up their wallets. US Housing figures were mixed as well, with New Home Sales down but Pending Home Sales up sharply. Although there are signs that the US economy is improving, this zigzagging makes it difficult to predict what to expect in early 2013.

Taking a look at fundamentals, UK Construction PMI, a key release, was a disappointment, dropping to 48.7 points. This was well below the forecast of 49.6. The Bank of England released its quarterly Credit Conditions Survey. In the report, the BOE noted that the availability of mortgages and business loans rose “significantly” in Q4 of 2012. The BOE pointed to the Funding Lending Scheme (FLS) as being largely responsible facilitating the increase in lending, and is hoping that this credit program will help boost the UK economy.

GBP/USD for Thursday, Jan 3, 2013

GBP/USD Jan 3 at 15:45 GMT

1.6157 H: 1.6253 L: 1.6146

GBP/USD Technical
GBP/USD has given up its recent gains, dropping to the 1.6160 range. The next line of support is at 1.6135. This line has held firm during today's sharp slide by the pair, but could see some activity if the pound loses more ground. On the upside, 1.6212 has reverted to a resistance role, after providing the pair with support earlier in the week.
• Current range: 1.6135 to 1.6212.
Further levels in both directions:
• Below: 1.6135, 1.6062, 1.5975, 1.5940 and 1.5825.
• Above: 1.6212, 1.6273, 1.6341, 1.647, 1.66, 1.6681 and 1.6752.

OANDA Open Positions Ratios
Although GBP/USD continues to fluctuate, the ratio has not changed, with a strong bias towards short positions. This is indicates that trader sentiment strongly favors a further correction to the recent surge by the pound. This correction is already underway, and we could see the ratio show some movement if the pound continues to drop.
GBP/USD continues to show a lot of movement, as the pair dropped sharply earlier on Thursday. Traders should be prepared for further fluctuation by the pair.
GBP/USD Fundamentals
• 9:30 UK Bank Of England Credit Conditions Survey.
• 9:30 UK Construction PMI. Estimate 49.6 points. Actual 48.7 points.
• 12:30 US Challenger Job Cuts.
• 13:15 US ADP Non-Farm Employment Change. Estimate 134K. Actual 215K.
• 13:30 US Unemployment Claims. Estimate 356K. Actual 372K.
• 19:00 US Federal Open Market Committee Meeting Minutes.
• All Day: US Total Vehicle Sales. Estimate 15.3M.

*Key releases are highlighted in bold
*All release times are GMT

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