Last week, there was talk that the Bank of England would implement negative interest rates. I was all set to begin shorting the Pound (mainly versus the U.S. dollar), but the BoE simply maintained interest rates, made no changes to its quantitative easing program, and had nothing new to say. The Pound lifted in “relief”, but on Friday I decided to short the Pound anyway.
Despite the dollar’s persistent weakness, I still expect a significant relief rally in the dollar sooner than later. I have chosen the Pound to ride a potential dollar relief rally because I consider the Pound to be the one currency that is at least as bad as the U.S. dollar. There are striking economic similarities between the U.S. and the U.K.: a lot of money printing, severe structural weaknesses in the economy some of which coming from the crash of a historic housing bubble, and an incredibly large government debt (in many ways, the U.K.’s debt burden is even worse, and the country has fewer foreign customers interested in buying the debt). I can only guess that the latest rise in the Pound within a months-long trading range has largely come as a coattail effect from the intense selling pressure the dollar has experienced lately from other major currencies.
For the short-term, I expect the Pound to return to the bottom of its trading range against the U.S. dollar (about a 3% move from Friday’s close). If the relief rally generates as much steam as I think is likely, the Pound should retrace a good portion of its bounce from the March lows (no specific target here).
The biggest wildcards to this scenario are the release of the Bank of England’s meeting minutes on September 23rd, and the U.S. Federal Reserve’s rate announcement the same day. Depending on how things unfold during the intervening ten days, I may have to lighten up or remove all positions ahead of those announcements.
Be careful out there!
Full disclosure: short GBP/USD, long EUR/GBP
8 thoughts on “Short the Pound Anyway”