Forex Blog: Currency Trading News & Analysis.

June 2nd 2009

British Pound Rises to Seven Month High, but Holes are Beginning to Appear

You may have noticed that the phrase “seven month high” appears quite frequently in recent Forex Blog posts, regardless of the currency being discussed. I offer this preface as context for Pound’s recent rally because it suggests that the factors driving the Pound are hardly unique from the factors driving other currencies. In other words, “It’s a mixture of a dollar-weakness story and a global-growth story.”

Of course, it would it be unfair to so glibly dismiss the Pound, so let’s look at the underlying picture. On the macro-level, the British economy is still anemic: “Gross domestic product dropped 1.9 percent in the latest quarter, the most since 1979, according to the Office for National Statistics. The International Monetary Fund now expects the British economy to shrink by 4.1 percent in 2009.” Without drilling too far into the data, suffice it to say that most of the indicators tell a similar story.

The only relative bright spots are the housing market and financial sector. Mortgage applications are rising, and there is evidence that housing prices are slowing in their descent, perhaps even nearing a bottom. Optimists, naturally, are arguing that this signals the entire economy is turning around. History and common sense, however, suggest that even if the most recent data is not a blip, it’s still unlikely that the UK will able to depend on the housing sector to drive future growth. Besides, there is anecdotal evidence to suggest that foreign buying (due to favorable exchange rates) is propping up real estate prices, rather than a change in market fundamentals.

The stabilization of financial markets is also good for the UK, as 1/3 of its economy is connected to the financial sector. “Sterling is basically a bet on global financial well-being…Now that the banking sector has stepped away from the Armageddon scenario, the prospects for London and the U.K. economy look better.” But as with housing, it’s unlikely that the financial sector will return to the glory days, in which case the UK will have to turn elsewhere in its search for growth.

What about the Bank of England’s heralded attempt at Quantitative easing? While it’s still to early to draw conclusions, the initial data is not good. In fact, the most recent data indicates that half of the bonds that the BOE bought last month (with freshly minted cash) were from foreign buyers, which causes inflation without any of the economic benefits from an increase in the domestic flow of money. Given that S&P recently downgraded the outlook for UK credit ratings, it’s no surprise that foreigners are moving towards the exits. In short, “With underlying weakness in money and credit – plus large gilt sales by overseas investors – we doubt that quantitative easing is playing much direct role in the economy’s possible turnaround,” summarized one analyst.

If you ask me, the Pound rally is grounded in nothing other than naive technical analysis, which relies on indicators that are largely self-fulfilling. In other words, if the Pound seems like it should rise, than it probably will, simply as a result of investor perception. “Citigroup Inc. said in a report last week the pound is ‘among the most undervalued major currencies…’ Barclays Plc predicts it will rise as much as 18 percent against the dollar and 11 percent versus the euro in the coming year. Goldman Sachs Group Inc. sees a 23 percent gain versus the dollar and 15 percent advance against the euro.” Call me skeptical, but it’s hard to understand what kind of analysis underlies these predictions other than simple intuition. Sure the Pound was probably oversold, but is a 20% rise is two months really justified?

The U.S. Commodity Futures Trading Commission data indicated a slight downtick, but “big speculative players continue to hold large net short positions in the pound versus the dollar,” which suggests that the savviest investors are not yet sold on the rally. Emerging markets offer growth and higher yield. Commodity currencies, such as theĀ  Australian and New Zealand dollars, rise in line with energy and commodity prices. Someone please tell me where the Pound fits into this?

SocialTwist Tell-a-Friend

Sponsored Offers

FREE Daily Email Updates

Enter your email address:

Delivered by FeedBurner

One Review of “British Pound Rises to Seven Month High, but Holes are Beginning to Appear”

  1. R. Mattern Says:

    Why is the pound rising in value when the econonmy is so fradgile? Because it sure helps the manufractures sell their products and the import and export is doing a lot better. So why does the GBS keep rising as to slow the econimy down and keep it from growing. If this is the way this banking system works it is at best as good as the labour party is now days. Out of control. Get the GBS back down so that Britian can grow and not be cut off again from the rest of the world as far as selling it goods. There is a lot of good men and wonem in the manufracturing business, I guess it is the people that set the price of the pound so that they can have a better holiday! It is not right.

Have Questions? Want to Share Your Review?

Be heard. Please share your reviews today!

Neighboring Posts

© 2004 - 2023 Forex Currency charts © their sources. While we aim to analyze and try to forceast the forex markets, none of what we publish should be taken as personalized investment advice. Forex exchange rates depend on many factors like monetary policy, currency inflation, and geo-political risks that may not be forseen. Forex trading & investing involves a significant risk of loss.