gbp fundamentals

British Pound Holds Above Support at 1.4805, Downside Risks Loom

Monday, 01 December 2008 22:30:40 GMT  |  Terri Belkas, Currency Strategist

After consolidating below 1.55 last week, the British pound plunged more than 400 points on Monday amidst mounting speculation that the Bank of England will cut rates aggressively on Thursday and as business activity in the UK manufacturing sector fell to a 16-year low.

Manufacturing PMI tumbled to 34.4 in November from a downwardly revised 40.7 amidst major declines in new orders, despite weaker input costs, while employment showed similarly disappointing results. Meanwhile, the BOE reported that bank deposits but non-financial companies fell by the most since 1980 at a rate of 5.2 percent in October, while lending growth to these companies dropped 6.5 percent, down 17.9 percent from a year earlier. Just last week, BOE Governor Mervyn King said that the lack of availability of credit is one of the most worrying developments in the economy, suggesting the BOE may have a lot more work to do to loosen up the credit markets. Thus, Credit Suisse overnight index swaps are pricing in at least a 75bp cut by the central bank on Thursday, but there is potential for an even more severe move which leaves significant bearish potential open for the British pound going forward. That said, GBP/USD did manage to hold above support at 1.4805, signaling potential for a retracement higher in the near-term. However, a break below 1.48 is likely to be following by a test of the November 13 low of 1.4557.

Related Article: British Pound/US Dollar Exchange Rate Forecast

Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.

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