The Pound has come under increased pressure in today’s session, with the GBP/USD pair sliding through its overnight support and hitting fresh lows for the week currently at 1.5660 in the middle of the New York morning trading session.

Looking at a 4-hour chart we see some bearish signals including a failure to hold above the 200 EMA as well as the 38.2% retracement of the full downswing since the middle of August (from 1.6620 to 1.5275).  We currently test the 55 and 100 period EMA’s and it looks like our next level of support will be the 1.5590 area, and below that our lows from last week near 1.5545.

If the pressure builds on the GBP, we could see a retest of our lows from late September (1.5330) and early October (1.5275). The upward correction in the GBP/USD pair which coincided with the general rally in risk assets seen in the previous two weeks is now correcting itself and that means that we are possibly resuming the dominant downward trend we had seen in this pair over the last few months.

Fundamental Picture Continues to be Troublesome for UK Economy

The fundamental picture continues to weigh on the pound. While inflation data came in stronger-than-expected at a 3-year high of 5.2% for September, it obviously isn’t going to change what we’ve already had which was the expansion of the BOE bond buying program.

The Bank of England has repeatedly warned that inflation will move above 5%, but will peak there and therefore has abdicated its responsibility in keeping inflation under wraps. Earlier in the year the justification was that inflationary pressures are mainly coming from outside sources that would not be impacted by higher interest rates for instance. That was higher commodity and energy prices as well as an increase in the VAT tax in the UK as part of austerity measures. What higher inflation does is rob consumers of their purchasing power, as well as lowers the real GDP rate.

The key fundamentals to look out for for the pound for the rest of the week include the Bank of England meeting minutes which are to be released in the next European trading session, as well as retail sales data due out in Thursday’s European trading session.

The BOE Minutes will give us further insight into decision to expand the central bank’s bond buying program, while retail sales will give us further insight into consumer spending amidst a slow recovery and heightened inflation pressures. The expectation is for a small 0.1% increase in retail sales for September, following a 0.2% decline in October.

Here’s a chart of UK retail sales:

We can see retail sales have been quite choppy of late, oscillating between gain and losses throughout 2011. Kind of a 1 step forward, 1 step back type of action. However, the UK economic situation has deteriorated of late, and so a negative print here will add further strain on the GBP.

Visit the UK Retail Sales page for a table of sales data.

The outlook for consumer spending remains week. In September, the CBI retail sales survey fell to its weakest level in 16 months. The survey showed a net balance of -15% of retailers saying sales were higher than the same month last year compared with those who said sales fell. The BRC retail sales monitor meanwhile did show the its sales index climbing 0.3% y/y in September, following a 0.6% decline in August.

A weak reading from the government’s official figures would only further the theme of weak domestic demand and add extra negative pressure on the GBP. If economic deterioration accelerates it may also force the government to ease its austerity program, which could weaken its position from the perspective of investors which have been buying the country’s bonds.

- Nick Nasad is the Chief Market Analyst at FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.