British Pound Showing Signs of Short-Term Bounce

12/02/2010 12:01 am EST

Focus: FOREX

The GBP/USD currency pair remains under pressure because of a variety of issues. Nationwide house prices in Great Britain slid 0.3% in November after falling 0.7% amid economists’ expectations of -0.4%. At the same time, the annualized rate climbed 0.4%. Indeed, homebuyers have scaled back amid tight credit conditions and increased concerns of spending cuts implemented by the government that will take place in the upcoming months.

Meanwhile, the pressure on the labor force will add additional pressure on the housing market in the UK as the coalition government will cut approximately 500,000 public sector jobs over the next four years. Not to be overlooked, the increase in the value added tax measures will keep inflation at elevated levels, which will weigh on household disposable income.
Also on the economic docket in the region, the PMI manufacturing report for the month of November jumped to a 16-year high as exports benefited from a weaker pound. Taking a look at price action, the British pound halted its eight-day decline, but downside risks remain as price action is capped by the 100-day SMA. Going forward, I do not rule out a test of 1.55.

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However, a bullish hammer-like close on Tuesday could suggest that the market has bottomed out for now near 1.5485 and is on the verge of a corrective bounce back towards the 1.5800 area over the coming sessions. Look for a lower top to carve out somewhere around the 1.5800 figure ahead of the next major drop towards 1.5300 further down.

By Michael Wright, currency analyst,
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