GBP/USD Forecast Dec. 21, 2011, Fundamental Analysis

On Tuesday, the pound strengthened against the dollar with the improvement in the general sentiment which damped demand on the dollar as a refuge after better-than-expected rise in German business confidence and successful bond selling by the Spanish Treasury.

German business confidence unexpectedly advanced for the second month; business climate indicator rose for the second month to 107.2 from 106.6 in November.

The data came after a wave of upbeat data from Germany which provided some hopes amid the mounting worries the euro area debt crisis would drive the euro zone and global economies into another recession.

In Spain, a bond selling witnessed a rise in demand and decline in yield where Spanish government auctioned 5.64 billion euros of short-term debt, above the maximum target of 4.5 billion euros. The yield on the 3-month and 6-month notes fell to 1.735% from 5.110% and 2.435% from 5.227% respectively.

Still, the main focus in the market is on the latest developments in the euro area. On Monday, the talks between European finance ministers resulted in an agreement which included providing the IMF with 150 billon euros to fight the debt crisis, where the loan may increase up to 200 billion euros if euro area outsiders the Czech Republic, Denmark, Poland and Sweden managed to get Parliamentary approval to give loans to the IMF.

Moreover, the pound was given an impetus after the rise inU.K.consumer confidence from 36 in Oct., the lowest record since 2004, to 40 in Nov.

In the U.S., housing starts showed a rise to 685 thousands in Nov. from 627 thousands.

On Wednesday, attention will be toward BoE minutes, due at 09:30 GMT; at the same time, public finance excluding interventions will be due with expectations referring to a deepening deficit to 19.0 billion pounds in Nov. from the prior 6.5 billion pounds.

Thereafter, eyes will be on U.S. MBA mortgage applications for Nov. 18 at 12:00 GMT while will be followed by existing home sales, as of 15:00 GMT,  which are estimated to record 2.2% drop in Nov. compared with a prior of 1.4%.