Fiscal Cliff Failure Cripples British Pound

Boosted yesterday by speculation that the US government was on the verge of a Fiscal Cliff agreement, the British pound rallied off of support at 1.6000 – towards resistance at 1.6050. But, with negotiations seemingly breaking down once again, it seems that the GBPUSD’s fortunes have taken a turn for the worse. The question now is – how long will this continue?

In conversations yesterday with House Speaker John Boehner, US Treasury Secretary Timothy Geithner outlined the White House’s demands for an aversion of the so-called Fiscal Cliff. The list included a hike on income taxes for higher wage earners (typically above $250,000) as well as a potential increase in taxes on dividend income, that would be equivalent to income tax rates.

Ultimately, the crux of yesterday’s disagreement involved the inclusion of additional spending to the tune of $80 billion, as the Obama administration looks to expand economic stimulus aid by $50 billion and extend unemployment benefits by $30 billion. In addition, Democratic leaders are looking for a “permanent” increase in the national debt ceiling. The topic of expanding the ceiling arises as the government is likely to hit the barrier in early 2013.

With Republican leaders unlikely to adhere to most of the demands, it seems that negotiations have landed back to square one – dashing earlier market hopes that a resolution would be here before Christmas.

The sentiment is adding to near term bearish pressure for the pound sterling – especially with the spot rate now testing resistance at 1.6075. The figure is being negatively reinforced by a 1.6309-1.6174 descending trendline, adding to a likely failure of the level. Should GBPUSD fail to rise above the 1.6075 resistance barrier, it would automatically activate initial support targets at the 1.5913 October 23rd session low.

GBPUSD ChartSource:  FXTrek Intellicharts
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