GBP Breakout & Treasury Stmt Preview

<p>The breakout in GBP/USD has taken place as anticipated in last week’s piece. What next? Despite the renewed contraction in UK construction PMI (November’s 49.3 […]</p>

The breakout in GBP/USD has taken place as anticipated in last week’s piece.

What next?

Despite the renewed contraction in UK construction PMI (November’s 49.3 is lowest in three months), GBP/USD is unruffled as the Greece/Spain negative event risk is shaken off by the approved buy-back for Greek bonds and Spain’s bad bank bailout. Back to the UK, yesterday’s release of November manufacturing PMI edged up to 49.1 from 47.3, suggesting a slowdown in the pace of contraction.

Wednesday’s Autumn Treasury Statement (prelude to next year’s Budget Statement) will be watched for which additional cuts are made to fund the £5bn spending planned for education, transportation health and science. Over £1bn in additional cuts in wages, and building rentals is planned. GBP traders will welcome signs of an IMF-approved stimulus with as much as £5bn targeting growth (kick-starting construction, shovel- ready projects & road networks), while simultaneously cutting a cumulative £2.5bn to meet the rating agencies’ scrutiny.

No additional asset purchases expected from the BoE on Thursday.

GBP/USD always held above its June trendline support. The triangle, whose September 21 trendline resistance held for 12 weeks, has now broken to the upside. Closing Monday above its 55-DMA, makes for an additional positive signal in a long series of bullish developments.  Multi-time frame oscillators continue to improve (from daily to weekly & monthly). A daily close above 1.6125 will be required to extend the rise towards 1.6196 –76.4% Fibonacci retracement of the decline from the September high to the November low. $1.6225 is now within sight before mid month.

Today’s RBA decision to cut rates by 25 bps to 3.0% had STRONG AUSSIE written all over it. The decision to ease was mainly to avoid further currency strengthening rather than necessarily tackle an emerging macro slowdown. The Aussie rallied following the rate cut. The RBA has been increasingly uncomfortable with Aussie strength. And with Chinese figures improving by the week, the upward pressure would have been further magnified by RBA inaction, especially following the recent IMF decision to include Aussie in its FX reserves. A rate hold would have made task of the RBA harder in containing any unwanted appreciation.

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