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Current Environment
As we anticipated, GBPUSD dropped 4.4% and gave most of the gains of the previous week. The biggest drop occurred on Monday following the Manufacturing PMI release (34.4 actual, 39.8 consensus, 41.5 prev.) and surrounded by major global fears of a multi-year US economic downturn and rumors of US nationalization of banks. Crude oil prices dipped below $40/bbl, something we did not expect to see again. The yen and the dollar, of course, remained strong amidst this strong current of investor fear.
The Bank of England rate cut to 2.0% last week was an expected morale-booster with little real effectiveness. What will help the UK or US economies is a change in the collective perceptions about the crisis – not monetary policy alone. Both King and Bernanke understand they need to be cheerleaders of sort. Obama also understands this and that is why he has announced a new major US infrastructure plan. Indeed, a change in perception will come in time.
Scenario Analysis
Last week we indicated that GBPUSD would most likely trade in a 1.4600-1.5550 range (1.4450 -1.5400 actual). Our forecasts for the low and the high for last week were within 1% for both sides. For the coming week, we see a GBPUSD trading range of 1.40-1.5100.
Last week we highlighted an opportunity to sell GBPUSD from the 1.53 level where the market closed the previous week and to take profit below 1.47 – a potential 600 pip (4%) gain for the week. For this week, we see a potential challenge of 1.50 – possibly at the start of the week – only to fall and set new lows for the year as the week progresses. We see sterling more susceptible to negative news than the euro, so we would not be surprised to see EURGBP to stay at the present high levels (around 0.86) or even higher before it corrects. Once EURUSD falls below 1.24, watch for a significant correction in EURGBP to the 0.83 level or lower.
As we anticipated, GBPUSD dropped 4.4% and gave most of the gains of the previous week. The biggest drop occurred on Monday following the Manufacturing PMI release (34.4 actual, 39.8 consensus, 41.5 prev.) and surrounded by major global fears of a multi-year US economic downturn and rumors of US nationalization of banks. Crude oil prices dipped below $40/bbl, something we did not expect to see again. The yen and the dollar, of course, remained strong amidst this strong current of investor fear.
The Bank of England rate cut to 2.0% last week was an expected morale-booster with little real effectiveness. What will help the UK or US economies is a change in the collective perceptions about the crisis – not monetary policy alone. Both King and Bernanke understand they need to be cheerleaders of sort. Obama also understands this and that is why he has announced a new major US infrastructure plan. Indeed, a change in perception will come in time.
Scenario Analysis
Last week we indicated that GBPUSD would most likely trade in a 1.4600-1.5550 range (1.4450 -1.5400 actual). Our forecasts for the low and the high for last week were within 1% for both sides. For the coming week, we see a GBPUSD trading range of 1.40-1.5100.
Last week we highlighted an opportunity to sell GBPUSD from the 1.53 level where the market closed the previous week and to take profit below 1.47 – a potential 600 pip (4%) gain for the week. For this week, we see a potential challenge of 1.50 – possibly at the start of the week – only to fall and set new lows for the year as the week progresses. We see sterling more susceptible to negative news than the euro, so we would not be surprised to see EURGBP to stay at the present high levels (around 0.86) or even higher before it corrects. Once EURUSD falls below 1.24, watch for a significant correction in EURGBP to the 0.83 level or lower.
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