GBP/USD Outlook May 13-17

GBP/USD dropped sharply late in the week, as the pair lost over two cents. The pair closed the week at 1.5353. This week’s highlights is Claimant Count Change. Here is an outlook of the events and an updated technical analysis for GBP/USD.

The pound’s rally hit a brick wall late last week, as the British trade deficit did not narrow as much as expected. while solid US Unemployment Claims boosted the US dollar.

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

1. RICS House Price Balance: Monday, 23:01. This important housing release is a good indicator of activity in the UK housing industry. The indicator has looked sluggish, posting three  straight declines. However, the markets are expecting a turnaround in the May reading, with an estimate of a healthy 2% gain. Will the index meet or beat the rosy prediction?
2. CB Leading Index: Tuesday, 21:00. This index is based on 7 economic indicators, but is a third-tier release since most of the indicators have already been released. The index has stayed in positive territory throughout 2012, and posted a gain of 0.4% in the past two readings.
3. Claimant Count Change: Wednesday, 8:30. This key indicator has posted drops in the number of unemployment claims since December. The previous release posted a decline of 7.0 thousand, easily beating the estimate of 0.0 thousand. The estimate for the upcoming release is another drop of 3.1 thousand. At the same time, the Unemployment Rate has actually risen in 2013, and edged up in April from 7.8% to 7.9%. No change is expected in the Unemployment Rate.
4. BOE Inflation Report: Wednesday, 9:30. The markets will be paying close attention to this quarterly report. It includes the BOE’s projection for inflation and economic growth for the next two years, which can have a major impact on the BOE’s monetary policy. BOE Governor Mervyn King will hold a press conference upon the release of the Inflation Report.
5. 30-year Bond Auction: Thursday, Tentative. UK 30-year bonds have been fairly steady, and usually do not have a major impact on the movement of GBP/USD. The previous auction saw yields climb back above the 3% level, with an average yield of 3.12%. No significant change is expected in the upcoming auction.

GBP/USD Technical Analysis

GBP/USD opened the week at 1.5574. The pair touched a high of 1.5598, but then took a dive, dropping all the way to 1.5314. GBP/USD closed the week at 1.5353.

Technical lines from top to bottom:

We start with resistance at 1.5875. This line has remained intact since early February. Next, there is resistance at 1.5750. This line saw a lot of activity in the first half of February, before the pound began a dive which lasted until mid-March. The next line of resistance is at 1.5648. This line was providing weak resistance in May, as the pound showed some strength against the US dollar. We next encounter resistance at 1.5560. This line was providing weak support at the start of the week, but broke as the pair dropped sharply. Next there is resistance at 1.5484. This is followed by 1.5416.

GBP/USD is receiving support at 1.5258. This line has remained intact since late April, when the pound started a rally which lasted until last week. Next, we encounter support at 1.5189. Below, there is a support line at 1.5061,  which was last tested in the first week of April. This is followed by 1.5010, protecting the all important 1.50 level. The final support level for now is at 1.4896, just below the round number of 1.49. It has held solid since mid-March.

I am bearish on the GBP/USD.

The markets are not bullish on the prospects of the British economy. This was underscored by the fact that a positive British Manufacturing Production release failed to prop up the pound, which took a tumble later in the week. We could see the pound move closer to the 1.50 level, especially if US numbers look sharp.