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.
