Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Will the British Pound Get Pounded?

Currencies / British Pound Jun 06, 2009 - 08:28 PM GMT

By: Money_and_Markets

Currencies

Best Financial Markets Analysis ArticleBryan Rich writes: When financial markets were on the way down, risk aversion reigned and every investment that was deemed risky crashed. The U.S. dollar and 10-year Treasuries did well as global investors fled to safety.

But for the last three months this trade has been in retracement mode. And the further it has retraced, the more it has fueled optimism in the outlook for a recovery.


Stocks have been rising. Foreign currencies have climbed. Even commodities finally showed some life, and when they did … they bounced strongly. As a result, the U.S. dollar and 10-year Treasuries have been sold.

Wednesday, though, was a key day in the financial markets.

That day may have marked …

The Top in This Aggressive Retracement Period — At Least For the British Pound …

Last year, British shoppers were flocking to the U.S., taking advantage of the pound’s strength.
Last year, British shoppers were flocking to the U.S., taking advantage of the pound’s strength.

Just last year the pound was soaring to all-time highs against the dollar. And UK residents were enjoying their buying power in the States … snapping up U.S. real estate and traveling for shopping sprees in places like New York City.

However, when the financial crisis hit the U.S., it was quickly found that the UK was just as exposed, if not more so. And when it was finally determined that many countries were not “decoupled” from the U.S., but were in fact highly interconnected, the pound and other currencies came tumbling down.

British Pound Daily

Source: Bloomberg

The chart above shows the severity of the pound’s crash. Six years of strength in the pound (versus the dollar) was given back in 14 short months!

But in the last three months the pound has aggressively regained 23 percent of this fall.

As this retracement trade across risky assets turned into a recovery theme for the markets, the policy actions in the UK coincided nicely, beginning to show some effects and glimpses of economic improvement.

Nevertheless, in the face of this strength, the pound has been dealt two harsh blows …

Two weeks ago Standard and Poors downgraded the outlook of the UK’s AAA credit rating. Yet the pound proceeded to rally over 7 percent in the following weeks.

Then a political scandal struck when members of Prime Minister Gordon Brown’s cabinet were exposed for personal spending jaunts with taxpayer money. Yet the pound continued to rally.

Why?

It had very little to do with specific interest in the pound. But it had everything to do with the across-the-board retracement of the collapse in risky assets that took place from mid-2008 to March 2009.

Risk Aversion Trade — Round #2

This week, the wholesale retracement in financial markets reached some very significant inflection points …

The U.S. stock market, which has led this retracement, steadily climbed higher and higher and fed into an optimism that has fed back into the stock market. And when the stock market rises and optimism rises, so does confidence about the economic outlook. And voila, we have green shoots.

But in all likelihood, this feel-good rally has run its course. The U.S. stock market has climbed 42 percent in 13 weeks. What’s more, it has now reached its 200-day moving average AND significant long-term technical resistance.

On Wednesday, a key reversal signal flashed. Now the pound is feeling the heat.
On Wednesday, a key reversal signal flashed. Now the pound is feeling the heat.

When confidence is being manufactured by a rising stock market in simple retracement mode during the worst economic period since the Great Depression … look out below!

If there is one glaring characteristic of this financial market environment, it’s the tight relationship that has developed between markets in global crisis mode.

In other words, when the U.S. stock market runs into a wall, so will practically everything else. You could see this very clearly on Wednesday when sharp sell-offs took place in currencies, commodities and stocks all at the same time.

For currencies, when this rally subsides the biggest gainers are likely to experience the sharpest declines. As for the pound, it’s already feeling the heat.

Take a look at the following chart and you’ll see a clear reversal signal …

British Pound Daily

Source: Bloomberg

I’m seeing the same kind of foretelling technical signals in the Australian dollar, which was the biggest mover among major currencies on the way up.

The Aussie dollar has climbed 31 percent in three months, tracking the U.S. stock market closely all along the way as you can see in the chart below …

S&P 500 and the Australian Dollar

Source: Bloomberg

Bottom line: We could be entering round two of the risk aversion trade. And if we are, you can be sure that all of the negative issues and threats facing economies will come back into the crosshairs.

That could mean major downside for currencies like the British pound and the Aussie dollar.

Regards,

Bryan

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in