Brave New World

Sterling’s Going Down 26/09/2009

The GBP has taken a real hammering over the past week. Both from a technical and fundamental perspective the signs are not too positive for Sterling for the remainder of the year. The UK simply hasn’t recovered as strongly as most other countries in the second half of 2009, consumers are in a long process of deleveraging with no end in sight, government spending hasn’t kick-started the economy nearly as well as was hoped by the Brown government. Next year, whoever is in power, the government of the day will introduce savage cuts in public spending and with what looks like a permanently diminished financial sector it requires some leap of imagination to figure out what will be the new engine of growth. Export led growth appears to be main answer, particularly from the Conservatives which appears to be very happy to see Sterling decline further. A combination of tight fiscal and loose monetary policy for the foreseeable future and official policy towards sterling being- at best- one of benign neglect, the British pound has much further to fall.

My favourite trade is to short GBPAUD, given the lucky country’s solid finances, strong export market to China and the far east and high interest rates. However, Cable and EURGBP are the main drivers of Sterling. GBPUSD has broken out of a fairly tight trading range of the last three months and looks like having broken a key support level of a classic head-and-shoulder neckline. FX360 charts it future progress.