British Pound Punished

British Pound Punished on Risk Aversion, Potential for Bounce?

The British Pound saw an extraordinarily volatile week of trade, setting fresh 26-year highs before matching its worst single-week decline since September of 2006. A remarkable carry trade unwind forced traders to liquidate overextended GBP longs across the board, sparking especially noteworthy moves against the oversold Japanese Yen. Economic data was relatively sparse on the week, but fears of global credit tightening led a flight to safety in virtually all global asset classes. Such a dynamic has undoubtedly hurt outlook for the British currency, but it remains to be seen that this unwind will continue through the short term. According to our Technical Currency Analyst Jamie Saettele, the Sterling is due for further decline against the Swiss Franc through coming trade. Outlook for Cable’s performance against the US dollar is similarly pessimistic; the GBPUSD may not see significant support until a test of a year-long trendline near the psychologically significant 2.0000 mark. From a more fundamental standpoint, the British currency will see little boost from economic data through the coming week. A pending Bank of England interest rate decision is highly unlikely to show a rate increase, and the central bank does not release commentary on unchanged policy.

The early going will see little foreseeable event risk on the second-tier GfK and Nationwide Consumer Confidence surveys, but continued volatility across financial markets may nonetheless make for choppy trading. This will almost entirely depend on the performance of risky assets across the world, with Sunday night’s Asian market open to prove especially important for the outlook on the week ahead. Given that the carry trade is inextricably linked to Japan and other regional markets, speculators will likely show their true colors and outlook for high-yielding currencies as soon as they hit their desks at the open. Late tumbles in North American equity markets suggest that the Japanese Nikkei index may open trade substantively lower, but this does not rule out a later rebound on improved appetite for risk. Pending such a turnaround, we could see the British Pound catch some relief against the Japanese Yen and other lower-yielding currencies.