The market start this week with a nervous tone as tension in Korean Peninsula. South Korea said it will proceed with artillery drill and the move will likely trigger retaliation for North Korea. North Korea warned of a "catastrophe" if South Korea goes ahead with the drills. Later in the day, the drill did happened but North Korea then said it will not retaliate despite "reckless provocations" from the South, as it was "not worth reacting". Markets were then calmed.

For the cable, the Confederation of British Industry (CBI) and Office for National Statistics reports have a negative impact.

CBI lowered growth forecasts this week for UK in the first quarter of 2011 to 0.2% from 0.3% as it predicts the rise in VAT and job cuts to shave growth, yet it does not predict the economy to fall back into recession, but Bank of England Markets Director Paul Fisher said UK might contract for one quarter in 2011.

Office for National Statistics reported that Britain’s budget deficit swelled to a record in November, underscoring the challenge facing Prime Minister David Cameron as his government prepares to implement the deepest spending cuts since World War II. Net borrowing was GBP22.8 billion (USD35.4 billion), compared with GBP16.7 billion a year earlier. That exceeded the GBP16.8 billion median forecast of the 12 economists in a Bloomberg survey.

On Thursday, the release of BoE minutes December monetary policy showed there is a split among members. There was a split three ways for a third month on the need for economic stimulus as some officials became more concerned that Britain’s bout of inflation may persist. Adam Posen kept up his demand to increase the GBP300bn bond-purchase plan by GBP50bn. Andrew Sentence voted to raise interest rate for a seventh month and the rest ensured no change in policy.

In US, the macroeconomic data was generally in line with forecasts and showed a moderate improvement of economy. A notable exception was durable goods orders, which were far worse than predicted. Initial jobless claims in the US increase marginally from 423k to 420k, in line with forecasts, which were promising a decline to 421k. Durable goods orders decreased 1.3% in November, following a 3.1% October decrease. The reading was noticeably below the predicted value of 0.5%.

Personal income and spending continued to rise last month. Personal income increased 0.3% in November, exactly as was predicted by analysts. Personal spending increased 0.4%, somewhat less than was anticipated by market participants, who expected a 0.5% growth.

The revised University of Michigan consumer sentiment index was 74.5 in the December, up from 71.6 in November. The index hasn’t changed much from the preliminary estimate of 74.2 and was near economists’ forecast of 74.7. Sentiment improved because of better conditions on jobs market but remained quite depressed.

New home sales were at a seasonally adjusted annual rate of 290k, above the October rate of 275k but below the economists’ estimate of 301k.

Next week is the a short week between the Christmas and New Years holidays – a period of understandably low liquidity that is notoriously fraught with spikes of knee-jerk volatility amid otherwise stand-still calm – seems hardly the time to be searching for trade ideas.

GBP/USD was as as high as 1.5575 before it fell to 1.5355 about 50 pips above my last week support level. By the end of the week, the pair has corrected its decline with the pair crossing from below the 1.54 handle and 1.5450. The pair close at 1.5436.

Looking down, 1.5350 was a support line during August and September and last week low. It serves now as a strong line of support.

Lower, 1.5230 capped the pair in the beginning of the summer, and is now has a different role. ne now.

Above, 1.55 handle is the immediate resistance level.

US economic revival

Economic news:

13 Dec

Moody's comment that the tax cut extension, if approved, would be negative to US's Aaa credit rating as it will "adversely affect" the budget deficit unless there are "offsetting measures". Moody's noted that "the negative effects on government finance are likely to outweigh the positive effects of higher economic growth."

14 Dec

13:30 GMT

US retail sales rose 0.8% in November versus consensus of 0.6%. Ex--auto sales rose impressively by 1.2% versus expectation of 0.7%. Headline PPI moderated less than expected to 3.5% yoy in November while core PPI dropped to 1.2% yoy, inline with expectation.

19:15 GMT

FOMC left rates unchanged at 0-0.25% target range as widely expected. In addition, Fed maintained the $600b longer-term treasury securities purchase program unchanged to "promote a stronger pace" of economic recovery. The plan will be carried out at a pace of about $75b per month. Also, Fed will maintain the existing policy of reinvesting principal payments from its securities holdings.

Dec 15

9:30 GMT

Uk’s ILO unemployment rate unexpectedly jumped from 7.7% to 7.9% in October. Unemployment rose by 35,000 in the three months to October and crossed the 2.5m mark.

13:30 GMT

US Data-CPI moderated to 1.1% yoy in November as expected. But core CPI accelerated from 0.6% yoy to 0.8% yoy. Empire state manufacturing index improved strongly to 10.57 in December. Industrial production rose 0.4% in November. TIC capital inflow dropped sharply to $27.6b in October. NAHB housing market index was unchanged at 16 in December.

Dec 16

09:38 GMT

UK November Retail Sales +0.3% M/M, +1.1% Y/Y, Compared to median forecasts of +0.4%, +0.7% respectively.

With the start of next year, consumer spending will fall drastically, affected by the rise in oil prices, elevated unemployment, higher VAT rates, and spending cuts along with other challenges that continue to suffocate household spending.

13:30 GMT

US initial jobless claims edged to 420K the week ended Dec 11, despite expectations for the figure to rise slightly from 423K to 425K. Continuing claims on the other hand rose slightly to 4135K over the week, compared to 4113K at last reading.

The US current account deficit increased to $127.23B over the 3rd quarter, compared to the revised $123.21B over the last quarter. The jump was more than the $126.00B most analysts were expecting.

US housing starts for NOV at 555k vs 550k expected; prior month's figure revised up to 534k from 519k.

15:0 GMT

US Philadelphia Fed Index rose to 24.3 in Dec from 22, the highest level since April 2005. Market consensus was looking for a decline to 15.0. Within the breakdown, new orders were up 14.6 from 10.4, average work week increased to 19.3 from 10.9 and delivery time rose to 8.5 from 2.1. Slightly softer though was shipments (7.3 from 16.8) and number of employees (5.1 from 13.3).

Dec 17

00:32 GMT

The proposed austerity measures are having an effect and the latest UK’s Nationwide consumer confidence level has fallen to an 18-month low. Nationwide consumer confidence (Nov) 45 versus 52 expected and 52 in the prior period. This is the fourth consecutive month the confidence index has decreased in UK and it is at its lowest value since March 2009.

11:00 GMT

London Fix: EURO and GBP came under some concerted pressure as talk circulated of sell interest lined up for the 11:00 fix.

Euro-zone trade balance (Oct) comes in at 5.2b beating expectations of 2.5b.

15:01 GMT

Leading indicators in the US rose in line with analysts’ expectations to 1.1% over November, compared to the downwardly revised 0.4% the month prior.This is the largest gain since March with the index at a record high.

Comments;

Developments in the US economy this week were generally better than expected and served to underpin the view that signs of improved economic growth in US continue to spring forth and simultaneously diminishing the credibility of the double-dip crowd.

This week, the retail sales report pointed to better consumer spending numbers. Another dip in jobless claims suggests improvement in the job market might not be far away. Industrial production gains and improving business survey data tell us the manufacturing recovery has legs. Finally, consumer prices remain in check, but producer prices are another story. Just as important, and in the spirit of the season, policymakers in Washington were able to put aside partisan differences and agree to an over $800 billion tax package that should likely provide a significant boost to economic activity over the next several quarters in 2011.

Beyond the next few quarters, a further improvement in US economic activity will require resolution of the outstanding issues holding back growth: clearing foreclosures, reducing uncertainty in the housing market, and repairing household balance sheets.

Technical Analysis:

On unexpected improvement in US Data and unimpressive UK data, GBP/USD was under pressure since it topped up at 1.59 handle on Monday (Dec 13).

The pair slide downward breaking the 1.55 handle. It managed to found support just above 1.5450 and the 100% lower fibo. This reflective of bearish sentiment.

For next week I am looking at support at 1.53 handle with immediate resistance at 1.5630 and a break of that level the upper resistance is at 1.5740.

ECB's QE

The primary factors affecting the fx market the previous week was- ongoing sovereign debt saga in Europe’s PIG, concerns over continued PBoC tightening measures, and geopolitical turmoil on Korean peninsula.

Early on Asian session on Monday, the market reacted to positive developments in the above three factors.

During the weekend, Ireland and EU/IMF reached a bailout agreement. The financial package will cover financing needs up to EUR 85b but unusually EUR 17.5b of it will come from Irish government cash reserve and from the national pension fund. So that's effectively, EUR 66.5b instead of EUR 85b which is lower than markets expectation. An extra year is also given to Ireland to reduce its deficit from current 32% to 3% of GDP, that is, by 2015.

In China, PBoC Deputy Governor Ma provided some relief to anxiety over further tightening, suggesting the central bank is comfortable with rapid credit and monetary growth as well as rising inflation pressures, with some of the recent actions already feeding into the markets. More importantly, Ma made no mention of continued policy tightening; instead suggesting PBoC will rely on bill sales to mop up excess liquidity.

On the Korean peninsula, the joint US-South Korea naval exercises are being staged as planned with no interference from the North, just as the leadership in Seoul pledges to bolster defenses of the shelled islands and China continues its campaign to bring Pyongyang back to the bargaining table.

But by European session, the markets have wasted little time with risk is on again, and are now taking aim at the Latin region of Europe; with focus has been firmly on Spain and Portugal as in recent days the Spanish 10-year yield down for the eleventh day in a row for a yield of 557 bp Belgium also came into picture as reported that Belgium has quietly be racking up debt like nobody else... or is that like everybody else! Debt-to-GDP is just about 100% now as the country has run around like a chicken without a head - quite literally, given that there has been no government in place - since April of this year where the Leterme government resigned. A couple of poor auctions for three and six month paper have put pressure of the sovereign CDS of Belgium, which are up 21 bp on the day and it now costs 202 bp to insure Belgian sovereign debt.

By Wednesday, during the European session, risk sentiment was reversing as there were talk of European Central Bank (ECB) may alter the EUR750 billion contingency fund in order to buy assets in a quantitative easing effort that would also serve to prop-up the bond markets in embattled countries like Portugal and Spain. Rumour that the ECB about to join the Fed and the BOJ by printing more money and hoping that all our problems will go away

On Thursday, ECB President Trichet was ambiguous about the degree of support the ECB is willing to lend to the peripheral nations during his monthly press conference, it has delayed its exit policy and increased its special liquidity operations until at least the first quarter of next year. This eases the immediate pressure on the peripheral nations' banking sectors, some of which remain addicted to ECB funding. Trichet also said that its bond buying programme would remain open.

ECB was then reported to be buying Irish and Portuguese bonds aggressively leading up to the ECB meeting. This complicates its strategy regarding the peripheral nations as it is saying one thing and doing another.

On Friday, US Dollar plunging across the board, weighed under a disappointing US Non-Farm payrolls report. U.S. November employment report came up lame of economists' expectations - Nonfarm Payrolls +39k vs. exp. 150k; Unemployment rate 9.8% vs. exp. 9.6%.

It appears there has been a shift in the market's reaction to poor data with regards to the U.S. dollar. Over the last few years such a scenario would have seen considerable risk aversion. Typically, the response has been significantly lower equities, higher bonds (lower yields), higher USD vs. other currencies - outside of the JPY or CHF (risk averse currencies), and mixed vs. commodities depending on their mood. In terms of Friday's price action, equities are only marginally lower, yields initially fell dramatically but have since stabilized, commodities have soared and the USD has been crushed.

Thus the post-QE2 environment, it seems the dynamics have changed for the dollar whereby positive US data is good and negative data is bad.

GBP/USD after breaking the previous week low bottom at 1.55 handle. From Tuesday onward the pair pushed upward to close by the end of the week just below the 1.58 handle at 1.5770 or at 38.2%.

From Tuesday, the pair move in similar pattern every day i.e. On London session, the pair went south but by New York session it recovered and reacted upward.

For the coming week, cable is expected to take out the 1.58 handle with resistance at 1.585 and the next resistance at 1.59. On the downside support is at 1.5670.