Moments like these remind me how swiftly the tides can change in foreign exchange.
The minutes from the Bank of England’s meeting in October showed that all members now support leaving quantitative easing at its current level of 175 billion pounds. This unified support marks a change in particular for Governor Mervyn King who earlier argued for increasing the amount quantitative easing and has been quoted as essentially supporting a weaker currency. On this news, the pound added to its rally from recent days against nearly all major currencies. For example, at the time of writing the pound is closing in on September’s high of 1.67 vs the U.S. dollar. As of yesterday’s U.S. close, the pound was up as much as much as 4% from recent lows of around 1.57.
With King stepping out of the way of the pound, the currency is once again free to join the rest of the industrialized world in beating up on the U.S. dollar. This change of events has not changed my bias against the pound, but it does leave me without a clear catalyst for aggressively shorting it. When I get that catalyst I will continue my approach of riding downside moves and closing out positions when momentum swings upward; I will also need to lean more on the euro and maybe the yen as the basis for shorting the pound instead of the U.S. dollar. In the meantime, it appears that currency traders are betting heavily on more positive economic news from the United Kingdom and are providing support even as the pound is now very extended to the upside. Some alert traders also took early note of the chart technicals that indicated the pound was switching back to an upside bias.
Be careful out there!
Full disclosure: no positions
The Pound still seems to me to be the most over valued of all the major currencies.Perhaps this is just my prejudice against units without backing from a substantial commodity base – Ultimately, isn’t the Pound like the Dollar absent natural resources and reserve currency status?
David,
I fully agree with you. I think I stated in one of my posts that I think the pound is at least as bad as the dollar given similar economic problems, large govt debt, and high amounts of currency printing. The pound however does not have a “flight to quality” status that can serve as some kind of (temporary) floor.