The economic data from the UK was a disappointment and may point to further GBP weakness in the coming months as the market fully prices in further quantitative easing from the Bank of England. We had reports on consumer spending and manufacturing data today, and employment data on Wednesday.

Expectations for Manufacturing Orders Slide

The CBI industrial trends orders is a leading indicator that shows us the expectations that manufacturers have for new orders over the next three months. The index slid to -24 showing continued deterioration over the last three months. the syndicate indication that growth will be weaker in the first quarter of 2012 especially considering the UK’s major market which is Europe continues to work its way through it sovereign debt crisis.

From CBI: “Activity in the manufacturing sector remained depressed in December. Total order books deteriorated slightly further, and export order books remained well below their long-run average. As a result, firms anticipate a fall in production over the next three months, with expectations negative for the third month running. Pricing pressures remain muted compared with earlier this year, albeit edging higher on recent months.”

Consumer Spending Falls in November

Consumer spending in the UK meanwhile fell 0.4% a bit more than expected and on does some of the positive change we had seen in the previous month (a 1.0% gain). we have highlighted the pressures facing the UK consumer including higher unemployment, stagnant wages that are unable to keep up with high inflation, and a deteriorating economic outlook. that suggests that consumer spending will continue to be week as you move into the next year and that’s who should way on economic growth.

* Data in graph are as released and do not reflect subsequent revisions.

Granted this indicator is a bit volatile, and one strong month is usually followed up by a weaker following month, and so we want to continue to monitor how consumer spending fares in the current economic environment. The CBI Distributive Trades Survey which measures expectations of retailors is due out next week. In its November reading it fell sharply to -19 from -11.

Total Unemployment Continues Rising

Earlier in the week we saw the total unemployment in the UK hitting a fresh 17-year high at 2.64 million. With the government continuing its austerity drive which includes cutting up to 700K in public payrolls, and weak prospects in the economy limiting job gains in the private sector, the weak labor market is a key reason for a gloomy outlook on the UK economy.

On the chart to the right we see the quarterly change in unemployment and the claimant count, and it shows us that the last 2 quarters have seen a sharp pick-up in the total number of unemployed.

In a slight positive we do see both showing slower gains in unemployment and the claimant count in the latest 3 month period (Aug-Oct).

Expectations for Housing Market Downgraded by Key Trade Body

Bob Pannell, chief economist at the CML, says: ““Despite the fact that activity levels have already been subdued for several years, we have pencilled in a broadly flat picture, for both mortgage lending and property transactions, at least until real incomes show signs of stabilising as inflationary pressures recede.”

He adds that lenders face tough conditions in the wholesale funding markets as a knock-on effect of sovereign debt concerns, and this could have a negative impact on the cost and availability of mortgages next year.”

Here’s more from the CML report:

From The Guardian: “Rising unemployment and increased pressure on household budgets will lead to more borrowers falling behind on their mortgages and getting repossessed in 2012, mortgage lenders have forecast.

The Council of Mortgage Lenders (CML) said 45,000 homes could be repossessed during the year, up 20% from an estimated 37,000 in 2011, as job losses took their toll on family finances. The number of property sales and total mortgage lending are also expected to fall.”

Weaker mortgage lending and a rise in foreclosures will certainly way on growth in the UK and is consistent with the theme were describing in the labor, manufacturing, and consumer spending data. Putting it all together we can expect the pound to fall under further pressure in the coming weeks and months.

GBP/USD – Pressured Already, But Set to Decline Further

As you can see in the above chart the GBP/USD pair has been on a very bearish path over the last month and a half. Yesterday we tested the 1.5420 level which was our low in November and found some support their. However the prospects of further soft economic data from the UK will only increase the expectations that the Bank of England goes through with another round of quantitative easing when its current purchases run out in the first quarter of 2012. As a result the GBP/USD should fall through the lows seen in November and December and attempt to attack the levels near 1.5340 – the lows in late September and early October (as well as in the latter part of 2010). a break of that level would be a major technical event.

So far the pullback from the latest decline is pretty shallow on the daily time frame and we may want to see a move to 1.5560 or so to secure a better risk reward on any shorts.

In the one-hour timeframe we do see the pair running up into some short-term resistance at the highs from Wednesday’s (12/14/11) session, and we also highlight the 1.5565 area which coincide with the 200–ema as well as an old level of support that was broken on December 13th.

- 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.