British Pound: How Much Further Can It Fall?

The British pound has fallen to a 7 year low against the US dollar and a record low against the Japanese Yen. Over the past 3 trading days, the GBP/USD has dropped more than 1000 pips or 7 percent. Consumer prices were hotter than the market expected, so what has fueled this aggressively selling?

One answer – FEAR

The market is afraid that the UK will turn into the next Spain or Greece. Over the past few months, they have been working overtime to inject more stimulus into the economy, but the more that they spend, the worse impact it has on the UK’s fiscal position. Deteriorating public finances has been the primary motivation for the recent downgrades of sovereign debt ratings by Standard and Poor’s. The FSA has dismissed this rumor but that doesn’t mean that the UK can’t be put on credit watch negative which would be one step before a downgrade. Investors are selling now and asking questions later because a downgrade would mean more losses for the British pound. Whenever a country loses its AAA rating, funds that are mandated to invest in only AAA assets need to liquidate and shift their positions elsewhere. We have seen this with Spain and could see it again with the UK.

Bank of England Governor Mervyn King will be speaking later today and he will probably attempt to calm the markets. But with employment data and the minutes from the latest monetary policy meeting due for release, his impact may be limited.

How Low Can the GBP/USD Fall?

The British pound has broken 2 key support levels – 1.45 and 1.40. Trends can last for a very long time in the currency market which is why there is a decent chance that we could see the GBP/USD slip to 1.3685, the June 2001 low. If that price level is broken, it would be a 16 year low for the currency pair. The 1.40 level is pretty critical on a closing basis. If the GBP/USD closes above 1.40 today, we may actually see a larger bounce, but don’t expect the currency pair to revisit the 1.45 level any time soon.

Monthly Chart of GBP/USD:

source: eSignal

source: eSignal

3 Comments

  1. Hi Kathy,

    I am looking for almost parity as the economy collapses. Here is my latest musings on my country:

    A or L

    A = Argentina = Depflation.

    L = Japan = Deflation.

    As we enter a depression there seem to be one of two paths that we can travel. One path accepts that there has been a debt bubble, that this is the cause of the depression. The other path does not accept there was a debt bubble and that it will be policy responses that will stop a depression: Bernanke Panky is a master of the 30s and Japan’s slump, his wisdom will save us from a depression.

    If you accept the L then you accept that it is better to let the market find it is price and not bailout the badly run businesses. You go cold turkey. You do not run up massive debts on the State’s balance sheet, which only leads to higher taxes. You want people to save. You want the State to cut it’s cloth, to face the new reality that the high tax take from the debt bubble is not coming back. The delusion is dead. You want the State to cut business regulations and taxes. You want all your focus on nurturing wealth creating industries that can sell their goods and services globally. You give grants to such companies.

    If you accept the A then you accept that you can manipulate the price in the market and bailout badly run businesses. You put off the day of reckoning. You run massive debts on the State’s balance sheet. You want people to borrow and spend. You want the State to expand and you expect the pre-bubble days to reappear like magic. The delusion lives on. You continue to over regulate and tax business. You want all your focus on spending and piling up debt. You give money to the profligate who ran up too much debt, you start printing money.

    Life in the L is like hell. Many lose their jobs and GDP collapses.

    Life in the A is horrible. Many lose their jobs and GDP collapses.

    L lasts three to ten years as the economy is re-engineered to sustainable wealth creating industries. House prices fall 50%+ from peak to trough, with little chance of rising for many, many, years. People start saving. Money is sound and the Pound holds up relatively well, considering the situation. With sound money the populace is able to clothe and feed themselves, the lights stay on. The State supports those in trouble. It invests in retraining.

    A leads to a collapse in the Pound as the markets realise that the country can never repay interest and principal. This leads to unsound money and rising inflation as import prices explode. Interest rates need to rise but this will gut the debtors. Wage policies are enacted and a spiral of inflation takes hold. This leads to hardcore poverty for millions as the Middle Class sees it’s wealth vanish. With a collapsed currency few are able to holiday abroad. The IMF are called in and State spending is slashed.

    Both A and L lead to a drop in living standards for the populace. The key plus for L is that once the pain is out of the way a new base for growth and prosperity can be engineered. The balance sheet is strong enough.

    With A the balance sheet is wrecked and the Middle Class has been devastated. Argentina is a prime example of what happens when the wealth of the Middle Class is squandered.

    In the L one gets a sharp painful deflationary depression.

    In the A one gets a multi decade long depression that could lead to inflation = Depflation. The country becomes an Undeveloping Nation.

    Our ruling elite and most of the punditocracy are taking us to A.

    —-

    It is all pretty depressing if you are British.

    All the best

    SIMON

    Reply

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