Ralph Shell @ 1:42 PM, Tuesday August 03 2010
The performance of the pound versus the USD over the past six weeks has been spectacular. In retrospect it appears that the conservative fiscal policies of the new government combined with disbelieving shorts was the set up for this big rally from 1.48 to over the 1.59 handle.
In a note published June 22nd titled Pound Rallies Following Release of Plans to Curb Deficit, we observed:
"This morning the pound was checking out the support in the 1.47 area when the new 39 year old Chancellor of the Exchequer George Osborne announced plans to reduce the budget deficit. Spending cuts, a two year public sector pay freeze, and higher taxes are all planned. Capital gains taxes will be immediately raised to 28% from 18%, the vat tax will go from 17.5% to 20%, plus a special tax on banks. Currency traders applauded the plan and the pound rallied back up to 1.4850.".....continuing we observed "The pound has long been a most favored place for the big spec shorts,
who have been so positioned prior to the election. The advance from the
1.4230 low has been orderly, but the market looks to us like there may
be more in the bounce. "
Such was indeed the case. Interesting to note June 22 was the first day of the MACD's crossover of the zero line, but now what?
From experience we now know that the conservative fiscal intentions of Britain's new government has been well received by the market. Further, there is no movement to commence similar policies in the US. However, the supposed downside to the Brit's policies is slowing of the economy, but economies do not stop and start as do lights on a switch. Do something today and the unintended consequences may remain unknown for six months. So far the economic news has been positive but what will it be going forward.
Further the island economy is deeply involved in world trade. The stronger pound may provide some head winds slowing future economic recovery.
It is hard to forecast how future numbers will unfold, or when the last of the big shorts will capitulate but we fully expect some resistance as we approach the 1.60 number. The market at the 1.5920 level looks overdone and we are willing to try the short side with a stop in the 1.6050 level.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.