Is Pound Vulnerable to a Sell Off?

Last updated 11/10/2009 3:56 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Pound dropped nearly 200 points in late Asian trade today after an official from Fitch Ratings stated that UK was the most likely of major economies to lose its AAA status. David Riley, co-head of global sovereign ratings at Fitch, said if there was another significant fiscal stimulus package in Britain its rating would be at risk.

UK budget deficits are projected to reach 11.6% of GDP this year which is actually lower than the 12.5% figures estimated for US deficit. However, because of UK economy’s smaller size and lack of reserve status for sterling, ratings agencies are worried that Great Britain will not be able to finance the expanding public deficits at the current low interest rate level.

Ironically enough the most recent batch of UK economic data has continued to surprise to the upside with the latest RICS reading jumping to its highest level in nearly 3 years suggesting that home values in the critical housing sector are rebounding strongly. Yet the question that continues to dog many analysts is whether UK economy can sustain its recovery in the absence of further fiscal stimulus. Tomorrow’s employment data should provide a bit more clarity to the market on that issue especially if it beats the forecast of 20K claimant count.

If UK labor conditions show material signs of improvement they may ease some of the nagging concerns about the balance sheet issues facing the country. Nevertheless, volatility in cable is likely to persist for the foreseeable future as the unit carries only a 50 basis point yield providing traders little protection on the interest rate front.

Despite an uptick in economic activity, the structural position of UK finances remains in a perilous state and makes sterling vulnerable to additional downside moves on even the slightest bit of negative news. Furthermore UK economy continues to rely heavily on the financial sector for its growth and as such is the most vulnerable of a the G-10 members to a sharp correction in the capital markets. Therefore, if equities begin to retrace into the end of the year, as investors try to lock in profits, risk aversion flows could quickly take pound below the 1.6000 level once again.

After stabilizing at the 1.6600 figure in the aftermath of the release cable consolidated ahead of the Trade Balance figure and may stage a rebound if the numbers beat the forecast of -6.1 Billion print. However, the pair now faces major resistance at the 1.6800-1.7000 level and appears unlikely to clear those hurdles unless this week’s labor data proves wildly positive.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.