The Cable has pulled back to our 3rd tier uptrend line after investors reacted negatively to today's data from Britain.  Most analysts are highlighting the report showing negative growth in retail sales over the past month.  However, viewing the data from a more historical perspective, British retail sales tend to deviate from 0% in both directions during good and bad economic times.

Additionally, the -0.6% decline we saw today is certainly a negative indicator, but nothing too abnormal.  The more disconcerting data releases today were the M4 money supply and CBI industrial order expectations.  The less than anticipated growth in the M4 money supply supports the concept of deflationary pressures, taking a bite out of corporate earnings in the process.

Additionally, the industrial order expectations number is still at a shockingly low level.  Therefore, orders aren't picking up as quickly as manufacturers would have hoped, indicating the global economy is recovering at a slow pace.

Despite Thursday's disappointing showing so far, yesterday's releases showed considerable progress concerning Britain's fight against unemployment.  The CCC is falling at an encouraging rate while average earnings are back in the green.  If we continue to see a downtrend in CCC and uptrend in average earnings then retail sales should trend upwards as well.

Therefore, even though the Cable is weakening today, we believe that Britain remains in an advantageous position economically as compared to the U.S. and EU.  Even though we've seen some negative pressure on the GBP/USD lately, bulls continue to come to the defense of the currency pair, preventing the Cable from retesting 1.60 for the time being.

However, should the S&P futures pull back further, the GBP/USD would likely participate to a certain degree due to their positive correlation.  Should near-term weakness in the Cable continue, the currency pair has considerable support between1.5850-1.60.

Therefore, there would need to be a decisive turn to the downside in U.S. equities for the Cable to leave behind this trading range.  This line of defense is represented by our 2nd tier uptrend line.

The GBP/USD is getting squeezed between our 3rd tier uptrend and 2nd tier downtrend lines as they approach their inflection point.  We notice a similar inflection point in the EUR/USD.  If the Cable reacts negatively to the collision, we could view a pullback towards our 2nd tier uptrend line.

That being said, we believe there is still a reasonable downward pressure on the Cable due to the present weakness in U.S. equities.  Therefore, a retracement towards 1.60 would not be surprising.  Regardless, the medium-term uptrend is in good shape due to the progress the GBP/USD has made since January lows.

With Britain's economic data out of the way for the week, movement in the Cable will likely rely more upon its positive correlation with U.S. equities.  Hence, investors should keep a close eye on the S&P and its ability to hold 900 should it be tested.   

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