Fundamental Outlook

Unemployment in the U.K. economy is expected to increase by another 80,000 adding to the 75,700 seen in November. It would be the largest increase in claims since March 1991, as companies start to increase layoffs in order to slash costs. The U.K. economy continues to be weighed down by a deteriorating housing market and tight credit markets. Prime Minister Gordon Brown announced a £100 billion bailout plan that will allow the BoE to purchase mortgage backed assets in effort to boost lending to businesses and consumers. However, the measures may be too late to avoid further weakness in the labor market. The unemployment rate is expected to rise to 3.5% from 3.3%, the highest since March 2000, but would be far from the 1993 high of 9.90%. Technical analysis is calling for further pound losses, which would coincide with the bearish fundamental data and would justify a short trade with a 1.3680 target. However, given current momentum we could see the target hit before the economic release and a bottom could be put in place followed by a bounce from support.

The GBPUSD broke the 1.4347 level and has declined some 500 pips more since. Expect additional downside in wave 5 (within the 5 waves decline from 2.1160) and a drop below the June 2001 low of 1.3680 prior to formation of an important bottom. Former intraday support at 1.4129 is potential resistance.