Nov 13 2008
GBP/USD Dives to 6 Years Low
Yesterday the GBP/USD suffered sharp losses and hit its lowest level in 6 years. The Cable lost 3.7% to end the day at $1.4893. The British Pound has been badly hurt the past five months from an economy that is operating in a recession and sharp cuts in Interest Rates by the Bank of England (BoE). BoE Governor Mervyn King yesterday said the drop in the Pound does not come as a surprise, and only further losses could spark a currency concern for the BoE. He also openly endorsed a policy for the further easing of Interest Rates to combat a recessionary environment. Currency traders may see a continued drop in the GBP/USD, potentially to the 1.4400 level.
The U.S. Treasury Department announced changes to the $700 billion Dollar financial system bailout. Funds will no longer be used to purchase bad asset-backed securities, but will instead go to recapitalizing troubled banks’ balance sheets. Capital will be directly invested in U.S. banks as the government will take equity positions to prevent further bank failures. The Dow Jones Industrial Average lost 4.7% of its value today after U.S. Treasury Secretary Paulson’s announcement.
The Dollar was strengthened yesterday by an increase in risk aversion and a drop in Oil prices as traders moved from higher yielding currencies to the Dollar. The revised financial bailout plan sparked investor’s fears that the U.S. plan to restore liquidity and reduce the lock-up in credit markets is not having the desired effect. A lack of confidence and an increase in risk aversion will motivate traders to buy Dollars over riskier and higher yielding currencies.
My Forex Blog
I think we could easily go as low as 1.30 or 1.40 because if you look at the 30 year quarterly chart and draw a trendline along the two low points in 1985 and 2001, you will see that we have just dipped below this trendline, which is around the 1.525 level.