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British Pound Lacks Fundamental and Technical Conviction

British Pound Lacks Fundamental and Technical Conviction

2010-03-11 15:30:00
John Kicklighter, Chief Currency Strategist

The British pound is struggling to find consistent direction. Looking at the fundamental backdrop, the aggressive move to unwind risky positions has let up and subsequently taken the pressure off the United Kingdom's combined troubles of a burgeoning deficit, slow economic recovery and impending government election. At the same time, this pullback in fear hasn't immediately translated into a rebound in risk taking - a move that would likely benifit the currency as risk premium is worked off. Nonetheless, the fundamental health of the sterling through growth, yield potential, fiscal and financial stability is not improving. In fact, uncertainty is actually growing. This is building pressure, whereby this fundamental activity will eventually act out when sentiment forces the issue (just like the plunge through the final two weeks of February).

This leaves me with a high level of uncertainty for this currency and something of a bearish bias. Yet, for most pairs, there is limited opportunity from the technical position for a possible revival of trend that falls back into the fundamental groove. Furthermore, after the aggressive selloff over the recent past; I don't think I would want to try to eek out limited follow through (just look at the wide ranges on all the pound crosses over the past year - we aren't far from pound support for this period). The only pair I have interest in is actually one that counters my bearish bias on the sterling. I went short EURGBP at 0.9125 where the pair is looking to confirm a descend trend of highs from 12/30/2008 to 10/13/2009 to price action over the past few weeks. Fundamentally, I am even less confident in the euro as the market is not fully discounting the deeply rooted financial problems the Euro Zone is facing (not to mention the restrained growth and distant hope for rate hikes that come along with it). I have set my initial stop at 0.9150 and a first target at 0.9010. A second objective of 0.8880 makes for a significant retracement into the middle of the wedge pattern.

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