Over the past few trading days, the British pound has been confined to a very tight trading range. The following chart illustrates the predicament that GBP/USD traders find themselves in right now and I believe that the breakout will be to downside with the GBP/USD testing 1.60 in the near term.
This morning, Standard & Poor’s announced that “We no longer classify the United Kingdom (AAA/Negative/A-1+) among the most stable and low-risk banking systems globally” and I have to say that this is HUGE. S&P had already lowered the U.K.’s place in its Banking Industry Country Risk Assessment gauge to Group 3 from Group 2 on Dec. 21. The risk of investing in the U.K. is now on par with the risk of investing in countries like Portugal, Saudi Arabia, Ireland, Chile and Austria. You can imagine what this means to investors looking for a place to put their money.
On top of that, the outlook for consumer spending is quite dismal. In my daily report yesterday for FX360.com, I talked about how the CBI retail sales index fell by the largest amount since August 2009 which suggests that U.K. consumers cut back spending after the holiday shopping season. There is a very good chance that this weakness will feed into the retail sales report and therefore we remain skeptical of the rally in the GBP/USD and believe that the odds are skewed towards a move down to 1.60. The latest announcement only strengthens this call.
Here’s a daily chart of the GBP/USD.
**Update on 6/30/09 at 1:30pm – GBP/JPY hit an intraday high of 160.27, hopefully you were able to bank some pips on this trade. The reversal candle that we have right now suggests that we could see a deeper pullback to 156.
We have a nice upside breakout in GBP/JPY this morning that has been driven by the strong rally in equities.
Tomorrow is also the end of the month, quarter and half year which means that fixing flows could lead erratic intraday activity over the next 24 hours. Typically fixing flows are partially based upon relative performance of stock markets over the past month, but because tomorrow is the month and quarter end, we could see divergent buying patterns by fund managers. This is because on a monthly basis, the S&P 500 outperformed the German DAX and U.K. FTSE but underperformed the Nikkei. On a quarterly basis however it underperformed the DAX and Nikkei but outperformed the FTSE. If the month and quarter to date performance were in line directionally, the fixing flows would be easier to predict.
However U.K. stock markets have dramatically underperformed Japanese equities which should pave for GBP/JPY buying over the next 24 hours. First quarter GDP revisions and the current account balance are also due for release tomorrow. The trade deficit narrowed in the first 3 months of the year, which means that the current account deficit should have narrowed.
Technicals, fundamentals and flow point to the strong potential for further gains in GBP/JPY
The Euro and British pound are selling off aggressively today on the heels of comments from government officials and market players.
Risk aversion has been a theme in the markets following the weaker than expected jobless claims and durable goods report from the US (read my full insight on these numbers at FX360.com)
The EUR/USD broke the 1.30 level after legendary investor George Soros said that the currency may not survive the crisis without a global plan. He is pushing for the European Union to come up with a way to deal with all of the toxic debt sitting on the balance sheets of European banks. To ask for each country to come up with its own solution is not the right solution, a regional response is needed. Earlier this morning, ECB President Trichet also said that he is not excluding cutting rates below 2 percent.
As for the British pound or GBP/USD, it has come under selling pressure on comments from UK Chancellor Darling, Bank of England Governor King and BoE member Blanchflower. This morning, in an exchange of letters Darling and King announced that the central bank is authorized to purchase up to GBP 50 billion in investment grade assets ranging from corporate bonds, commercial paper and syndicated loans. Details will be released next week. The Chancellor also talked about Quantitative Easing and how the BoE needs his written approval to use the money for Quantitative Easing which entails purchasing UK gilts. Although more stimulus should be ultimately good for the country, many investors fear that the UK could become the next Iceland.
There has been a lot of volatility in the foreign exchange market this morning, driving currencies to historic levels:
GBP/USD – 23 Year Low
USD/JPY – 13 Year Low
NZD/USD – 6 Year Low
EUR/JPY – 6 Year Low
CAD/JPY – 13 Year Low
GBP/JPY – Record Low
NZD/JPY – 8 Year Low
The most significant moves have been in the British pound, which fell to a 23 year low against the US dollar and in USD/JPY, which fell to the lowest level in 13 years. Comments from former Fed Chairman Volcker triggered a wave of risk aversion that led to a technical break in the currency market. He said “we are in serious recession, with no end clearly in sight.” Although there is no question that the US economy is in trouble, by saying that there is no end in sight means that there is no hope which coming from the chairman of Obama’s newly formed Economic Recovery Advisory Board is significant. By saying that he does not an end to the recession is certainly not good advice. Treasury Secretary Nominee Geithner expects an Obama economic stimulus plan to be released in the next few weeks but unfortunately Volcker’s comments overshadowed the prospect of a stimulus plan. Yesterday’s sharp sell-off made investors nervous but Volcker’s comments pushed them over the edge.
We are continuing to see flight to safety into the US dollar and Japanese Yen. Investors are looking to hide in the lowest yieldind currencies.
We also had comments from ECB President Trichet and SNB President Hildebrand. Trichet defended the ECB’s monetary policy and said they haven’t decided if 2 percent is the lowest level for rates.
Intervention by Swiss National Bank?
The Swiss franc collapsed after SNB Hildebrand said that the central banks is considering selling francs to halt the currency’s gains. With interest rates already at 0.5 percent, they have no room to ease monetary policy. Therefore they may have to resort to fixed rate currency intervention.
With the US markets closed for Martin Luther King’s Day, the odds were skewed towards a quiet trading. However, big news in Europe has made it anything BUT quiet.
After hitting an intraday high above 1.33, the EUR/USD has sold off aggressively on news that Standard and Poors downgraded the sovereign debt rating of Spain from AAA to AA+. The outlook is stable which means that further downgrades for the country is unlikely. However this could be the beginning of more downgrades in the Eurozone. Last week, Greece’s sovereign debt rating was downgraded as well to A- while Ireland and Portugal have been placed on credit watch. The reasons for the downgrades are obvious. The Eurozone is in recession and those countries have suffered greatly. Also, public finances have deteriorated materially since the governments are trying to spur growth by spending.
British Pound Below 1.45 After New Announcements by UK Government
The British pound has also fallen below 1.45 after the UK Treasury announced more groundbreaking measures to stimulate the UK economy. They have set up a program to guarantee bad debts and buy up to GBP50 billion in private sector assets. They will also be increasing their stake in the Royal Bank of Scotland. This is aimed at pumping more money into the economy and may be a step towards quantitative easing. Although the UK government has been the most aggressive in coming up with measures to turn the economy around, the British pound has sold off because investors fear that the step was taken because the outlook for the UK economy was worst than feared. They are also doubtful that the government’s efforts will pay off.
In the long run, all of the stimulus that the Brown and company have injected should make the UK the first country to recover when the global economy stabilizes. This is why I am long term bearish EUR/GBP.