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How Low Can GBP/USD Go?

Last updated 3/9/2009 10:40 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Cable has fallen a remarkable 400 points at the starts of this week’s trade hitting lows not seen since the end of January. What’s behind the sell off and is it likely to continue?  Tonight’s drop in the pound was triggered by yet more bad news from the UK banking sector. Shares of Lloyds PLC tumbled 14 percent after  UK’s biggest lender ceded corporate control to the government in return for state guarantees covering more than $367 Billion of assets.

As we noted earlier today,” Cable continues to be vulnerable to the woes of UK financial sector as currency markets fear that despite massive government capital injections and  guarantees many of the key banking institutions will not be able to survive the crisis as the rescue packages are beginning to be viewed as classic examples of throwing good money after bad.”

There is no doubt that the overhang of bad debt from the UK’s major banks continues to dog the pound, and with Quantitative Easing as the only policy choice left for the BoE the concerns about dilution to the currency are unlikely to disappear any time soon. Nevertheless, the majority of recent economic data from UK has shown some degree of improvement suggesting  that perhaps the worst of financial fallout may be over. Furthermore, the weakness in the pound should eventually  translate into better growth making the country’s  service and manufacturing sectors a bit more competitive.

Ultimately however, UK’s economy remains inextricably tied to  finance.  If the problems at UK’s major banks continue to proliferate, the drag on the currency will be inevitable.  For time being cable has been lifted off the day’s lows by better risk appetite in the equity market. However, with the pair approaching the 1.3500 lows set in mid January, the temptation to push for retest will only grow as the week progresses.  

1.3500 remains the key level for cable and should it give way, it would suggest that the problems of the UK financial sector  has only become worse and could in fact threaten UK’ credit rating. Under such conditions a run to the 1.2000’s in GBP/USD and perhaps yet another assault on parity in EUR/GBP cannot be ruled out as a possibility.

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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.