The sterling is extending its decline from early January highs against the greenback in levels shy of 1.6400 to where it currently trades in the mid 1.5800s. This reflects a similar move which occurred in the near past, when GBP/USD advanced to the area around 1.6320 in late September before falling to the area around 1.5840 in mid November, before another leg up just followed.
… Gloomy prospects in the U.K.
The short-lived boost that the Olympics gave to the U.K. economy failed to ignite a more solid recovery towards Q4 2012, and what at the beginning were rosy skies for the pound, now have dark clouds suddenly started to appear in line with the eurozone.
However, it all changed since the last ECB gathering, considered a breakeven point, where President Mario Draghi unexpectedly changed its former dovish tone for a more aggressive one, exposing its views of a recovery in the euro area despite the bumpy road ahead of the present year. Since that moment, the quasi safe haven condition of sterling started to tumble, intensified after market participants were piling up to return to the eurozone, as the crisis was … over? Consequently, the inflows towards euro assets were increasing pari pasu with the outflows from the pound.
Recent U.K. data and results show that the economic backdrop of the U.K. is far from restored, let alone marching firmly towards a sustained recovery. Today's drop in the U.K.'s jobless rate, despite its positive meaning, should not lead investors to think anything different. In addition, yesterday dovish speech by BoE Governor M.King added yet more selling pressure to GBP after he mentioned that the central bank is ready to inject further stimulus into the ailing economy should the situation worsen; he even hinted the likeliness of a rate cut. As if the aforementioned was not enough, the specter of a cut in the sovereign credit rating continues to hover among investors, and many analysts are not ruling out the possibility that the U.K. might lose its AAA condition this year.
In addition, and opening a new front, this time a political one, PM David Cameron called for an "in-out referendum" regarding the U.K. being part of the European Union in today's speech, adding more pressure to the cable.
When comes to technicals, analyst Karen Jones at Commerzbank, comments, "GBP/USD is consolidating/holding sideways very near term and we would allow a very small bounce. The market recently traded through 1.5830, but held this level on a closing basis … Rallies are expected find initial resistance at 1.5940 (23.6% retracement of recent leg lower) and 1.5966 (accelerated downtrend) and remain capped 1.6170/85. While capped here, the risk will remain on the downside."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.