The Pound Gains on Weak US Data

The dollar has been the pillar of strength over the past two weeks as the US has posted the best economic data for April when compared to the other developed regions.  European data has been horrible, driving the Euro down to resistance levels, while the Pound has gained ground, on slightly better than expected data.

US data for April was strong in the beginning of the month of May, but there have been a number of data points, including Thursday Housing starts and Jobless Claims that show that the US is barely gaining economic traction.  Inflation on the consumer level was reported reflecting a fall in prices. Manufacturing data continues to show weakness as witness by Thursday Philly Fed Survey.

Prior to the opening bell in New York, the Labor Department released CPI.  With the Federal Reserve targeting a combination of both employment and inflation, both numbers have taken on significant meaning.  The consumer price index fell 0.4% in April with the majority of the decline coming from a drop in energy prices. This compares to expectations of a decline of .3% and a March reading of a decline of .2%.

The soft inflation picture will allow the Fed to continue to argue that the economy is in need of significant stimulus and will likely continue to keep the dollar buoyed as investor purchase dollars to buy US stocks.

The employment picture in the US showed a surprising soft patch with an increase of jobless claims by 32,000 to 360,000 according to the Labor Department. It was the largest weekly climb in the past 6-months.  Economists surveyed had forecast 330,000 new unemployment claims.

The housing market in the US has been improving and Thursday’s Housing Starts and Building Permits release somewhat clouded the picture.  According to the Commerce Department housing starts declined to a rate of 853,000 in April, a 16.5 percent decline month over month.  Building permit applications climbed 14.3 percent to 1.02 million, the highest since June 2008.

While economic data in the US has been soft, the UK has shown a bit of strength recently.  Wednesday’s better than expected unemployment report has diminished the likelihood of the MPC voting to initiate a gilt purchase program.  The UK government reported that the unemployment rate edged to 4.5% from 4.6% in April.

The new has helped the pound rebounded, as yield differentials favor a stronger pound.

The technical picture of sterling versus the dollar shows a currency pair that held support near the 1.52 level.  A close below this area would likely see a test of the 1.5025 region and then the lows made in March at 1.49.  Resistance on the GBP/USD is seen near the 10-day moving average near 1.54, which coincides with a 38.2% retracement of the decline from January to March.  The next Fibonacci retracement level is 50% which comes in near 1.56 and the 61.8% level at 1.58.

Momentum continues to point to lower prices, with the MACD (moving average convergence divergence) index printing in negative territory after generating a sell signal during the second week of May.