Weekly Recap and Outlook for GBPUSD - 7/26/2010

Written by ForexTraders.com on July 26, 2010 at 4:36 PM ET

GBPUSD began the week trading lower on Monday as the U.K. Rightmove HPI declined by -0.6% versus an increase of 0.3% for the previous reading. The rate firmed somewhat on Tuesday, despite U.K. Preliminary Mortgage Approvals declining to 48K versus a consensus of 52K expected, while Public Sector Borrowing increased to 14.5B versus the 13.2B expected, with the previous number revised upward to 17.1B from 16B. Also on Tuesday, U.K. CBI Industrial Order Expectations declined to a reading of -16, much better than the reading of -24 expected.

On Wednesday, GBPUSD made its weekly low of 1.5123 as the BOE released the Monetary Policy Committee Meeting Minutes for June. In the minutes, the BOE revealed that MPC member Andrew Sentence voted against keeping rates unchanged in July for the second consecutive month, being the only dissenting vote. Adding to the sell off were comments by MPC member Posen that stated, "more than 50% likelihood in my estimation the right next move will be to loosen rather than to tighten".

GBPUSD then started rallying on Thursday as U.K. Retail Sales increased 0.7% month on month, which was better than the expected 0.5% rise, with the previous number revised upward to 0.8% from 0.6%. Cable then saw a sharp rally on Friday, driving the rate up to its weekly high of 1.5448 after news that the U.K. GDP increased by 1.1% quarter on quarter, versus only 0.6% expected. GBPUSD then sold off slightly on profit taking to close the week out at 1.5421, up 0.8%.

Fundamental Outlook for GBPUSD

The primary market-moving economic data releases and policymaker speeches scheduled for this coming week in the United Kingdom and the United States are as follows:

United Kingdom:

The upcoming U.K. economic calendar calms down significantly, although it does feature the important Nationwide House Price Index (HPI) due out on Thursday. Monday begins the week on a quiet note, with nothing significant scheduled for release.

Tuesday then offers CBI Realized Sales (-3), while Wednesday has scheduled some important testimony from BOE Governor King, along with MPC Members Andrew Sentence, Charles Bean, David Miles, and Paul Fisher, on the topics of financial stability and monetary policy before the Treasury Select Committee in London.

On Thursday, look for the highlighted Nationwide HPI (-0.4% m/m) data, as well as Net Lending to Individuals (1.3B m/m), Final Mortgage Approvals (48K) and GfK Consumer Confidence (-21).

Thursday ends the week since Friday has nothing notable due out.

United States:

The calendar of economic data releases for the United States coming out this week is moderately active like the previous week, and offers some interesting data for forex traders on the U.S. economy. The U.S. economic calendar features Friday's key Advance GDP data.

The week commences on Monday with just New Home Sales (317K) due out. That is followed on Tuesday with the S&P/CS Composite-20 HPI (3.8% y/y), as well as the important CB Consumer Confidence index (51.5) and the Richmond Manufacturing Index (20).

Wednesday offers Core Durable Goods Orders (0.6% m/m), plus Durable Goods Orders (0.9% m/m) and the closely watched Fed Beige Book.

Thursday only has Initial Jobless Claims (456K) out in terms of notable releases, and Friday closes the week with plenty of action.

Releases on Friday include the highlighted Advance GDP number (2.5% q/q), plus the related Advance GDP Price Index (1.1% q/q) and the Employment Cost Index (0.5% q/q). Also out on Friday are the Chicago PMI (56.1), the Revised University of Michigan Consumer Sentiment survey (67.5) and University of Michigan Inflation Expectations (last 2.9%).

Technical Outlook for GBPUSD

On the technical front, GBPUSD consolidated above the 1.5123 level in the initial part of last week before the rate spiked sharply higher on Friday to make a high print of 1.5448, just shy of the previous week's 1.5470 high. The rate closed the week slightly lower at 1.5421, up 0.8% overall.

This latest upward move could be the start of a move that may well see the retest of the 100% retracement level of the decline from 1.5521 seen on April 15th to the 1.4229 low of May 20th. Since the key 61.8% Fibonacci retracement level at 1.5027 has already been bested and was sustained last week, this now puts the 1.5521 100% retracement level in play.

Furthermore, the rate is trading within an upwards sloping channel with the upper line now providing resistance at 1.5595 and the lower trend line of this pattern providing rising support for the rate at 1.5177. While it held on this recent decline, this lower line is important to watch for a break down in Cable that may signal the end of this upward correction.

In addition, the corrective upward move that originated at the 1.4229 low has generally remained fairly orderly within that channel pattern, with the 14-day RSI also moving within a distinct upwards channel pattern. Since the last high in GBPUSD seen at 1.5470 failed to meet the top line of the channel on the RSI, it now bears close watching to see whether any new highs made this coming week will exceed the 69 level made concurrently with the 1.5470 high. If not, then such bearish divergence would indicate a possible reversal lower for Cable.

Interestingly, the rate is now approaching the level of its 200-day Moving Average that now comes in at 1.5568 and remains downward sloping, although its slope is noticeably flattening out. The level of this indicator should provide resistance, but a sustained break above it could neutralize the medium term outlook for GBPUSD from its current bearish reading.

Resistance to the topside for GBPUSD shows in the 1.5448 to 1.5521 region (right around the psychological 1.5500 level), as well as in the 1.5574/ 1.5579 region and above that at 1.5764. Support is indicated at 1.5347, in the 1.5250/94 region and below that at 1.5123.

Overall, this scenario continues to confirm a short term corrective upwards trend that indicate a long position, within a medium term bearish outlook for GBPUSD that would make selling current levels attractive from that longer term perspective.

The short term bullish picture for Cable would be reversed on a confirmed downside break of rising channel support now drawn at 1.5177. Also, strong resistance at 1.5520 may well provoke a reaction lower, so traders with long positions may consider taking profits ahead of that key level.

Figure 1: Daily candlestick chart of GBPUSD showing its 200-day MA in red, Bollinger Bands in green, Fibonacci Retracement levels in royal blue, Trend Lines in purple and the 14-day RSI in the indicator box in pale blue.