gbp fundamentals

British Pound the Worst Performer in G10 on Dismal Economic Data

Saturday, 20 December 2008 00:35:55 GMT  |  David Rodriguez, Quantitative Analyst

The British Pound tumbled against all major currencies, as a steady wave of dismal economic data doomed the Sterling to further losses. Deterioration in Bank of England interest rate outlook and a larger-than-expected British unemployment rate gain further cast further gloom on fundamental sentiment, and there seemed to be no respite to the steady stream of bearish reports. Limited economic data in the holiday-shortened trading week ahead makes major shifts in outlook highly unlikely, and the British Pound may continue to decline absent a clear shift in trader sentiment. 

Fundamental Outlook for British Pound: Bearish

- British pound tumbles to record low versus euro on biggest-ever decline
- Bank of England Minutes show decision was unanimous to cut rates by 100bp

It remains extremely difficult to predict what will happen through illiquid year-end forex trading—especially as global economic calendars remain virtually empty. The fact that many of the world’s major banks will essentially remain inactive means that market conditions will be especially illiquid. In 2007, extremely thin year-end market conditions meant that a relatively marginal amount of US dollar selling sent it significantly lower against major forex counterparts. Yet in many previous instances, holiday-shortened weeks have brought relatively uneventful trading.

Regardless of what happens in the week ahead, medium-term British Pound momentum remains firmly to the downside. The British currency has already seen its worst trade-weighted depreciation since it left the gold standard in 1931. Such an overwhelming downtrend does not end overnight, and our longer-term forecasts remain bearish for the British currency. In the meantime, however, our Senior Strategist believes that thePound could set a significant bottom against major forex counterparts.  – DR

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