By Russell Glaser – The UK economy is showing signs of higher inflation along with a slowing housing market. Grumblings have been heard of an economic picture with stagflation on the horizon. At the same time, the Cable shows signs of a pair that is failing to move higher in its current uptrend.
Yesterday, the Nationwide Consumer Confidence number dipped to its lowest level since May of last year. The data was reported at 56, on market expectations of 60. The previous reading for the indicator was higher at 63. One of the causes of the drop in confidence numbers is due to consumer disparity over the British economy, persistent unemployment, and low wages.
Other data released this week shows a weakening housing market in the UK. The RCIS House Price Balance fell 8% on expectations of a 5% rise. This is a sharp contrast between market expectations and the reality on the ground. This is also the first drop in home prices in over a year, certainly a worrisome figure.
Inflation is also becoming a concern in the UK. VAT is expected to rise 20% in January, which could increase an already high rate of inflation in Britain. Fuel prices and wheat prices are also on the rise.
Future tax hikes are expected to come as Prime Minister David Cameron’s new government is focused on cutting the national deficit and implementing fiscal austerity. This strict adherence to limited spending could shave a few points off of UK growth rates.
Following high inflation and slowing growth of the British economy, a combination of these two factors could lead to a period stagflation. This will not be positive for the pound.
Technical factors for a reversal in the bullish trend have already begun to show on the charts. The weekly chart shows the pair has failed to breach a resistance level at 1.5960. This price level coincides with a 61.8% Fibonacci retracement level from the high of last August. Support for the pair comes in at the October low at 1.5700.
The daily chart displays Monday’s trading had the pair forming a bearish engulfing pattern and yesterday the pair closed near its opening price forming a rickshaw man. The long upper and lower shadows of yesterday’s candle show indecision on the part of traders. As this candlestick appears at the top of an uptrend, it could signal a top in the recent bullish move.
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
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