GBP/USD Fundamental Analysis Forecast January 16-21, 2012

By FX Empire.com

Economic Events

Historical:

Highest: 1.681 USD on 17 Nov 2009.

Average: 1.5807 USD over this period.

Lowest: 1.4321 USD on 19 May 2010.

Support: 1.549 1.5300 1.5260 1.5210

Resistance: 1.5325 1.5360 1.5410 1.5450

Current Trend: flat / sideways

Rule:

GBP/USD: While the ranges are wider (and so should stops be), the lines are rather distinctive, especially towards the borders of the long term wide range. This pair makes for good trades, with the new austerity program implemented in the UK, the GBP is moving more on Fundementals now. Easy to trade against the USD.

Characteristics

Average broker spread: 4-5 pips
Daily range average : 150-200 pips
Best time to trade: Euro Session (0700 GMT – 1700 GMT)
Some factors affecting the GBP/USD rate:

• The interest rate differential between the Bank of England(BoE) and the Federal Reserve
• High yield and attractive growth in the UK drives GBP/USD higher

Trading the GBP/USD

Trading Experience: Expert currency traders
Trading Style: Day trading and Swing trading

How to trade?

Applying Technical Analysis and/or Analyzing Fundamental News from the UK and US zone to make GBP/USD trading decisions. Watch out for false break outs. Surprising economic news releases can make the GBP/USD move a lot in one direction without much retracements.

Analysis and Recommendation:

The Sterling was the worst performing major currency on the week, falling 0.8 percent against the U.S. Dollar while faring worse against the commodity currencies. Part of the GBP’s underperformance this week was tied to the negative sentiment revolving around the Euro, which was the second worst performer this week. Still, regardless of the situation evolving in Europe – we’re now in a slow, steady decline rather than the rapid plunge in the second half of 2011 – the British economy is a disaster. Unfortunately, David Cameron’s austerity program is not working as he perceived, without a plan to revive the entirity of Europe, the UK will continue to be pulled down by its neighbors.

Data the past week wasn’t kind to the British Pound, and the week ahead offers little reason to be bullish on the currency from a fundamental perspective; a retracement by the U.S. Dollar or significant Euro strength will be necessary going forward to support the Sterling. Two pieces of data in the coming period stick out that should be watched that will shape future price action by the Sterling in the long-term.

Tuesday, inflation data is due for the month of December. The consumer price index, on a year-over-year basis, is forecasted to fall to a 4.2 percent rate, down from 4.8 percent in November. This is certainly a welcomed development for the British economy, which has been stagflating for over a year now (stagflation is a growth environment characterized by low growth, high inflation, and high unemployment). With the inflation rate expected to remain more than twice the Bank of England’s target of 2 percent, the economy remains in trouble, and measures need to be taken to help contain price pressures.

With the high rate of inflation, the other two characteristics of a stagflating economy – low growth and high unemployment – still exist. On Thursday, labor market data is due, and the unemployment rate is expected to remain elevated at 8.3 percent. Measures set forth by the government to reel in the country’s massive debt burden have weighed on the economy, forcing many out of work as companies trim costs amid a rising tax rate environment; austerity and growth rarely go hand in hand as seen in Greece.

In light of all this, it’s clear the Bank of England is in a quandary. With expectations rising that the Bank of England will unleash another round of quantitative easing in the coming months, short-term interest rates will be depressed. In this case, with the British economy stagflating and data due this week supportive of that belief, any further easing will weigh on the Pound.

Originally posted here