A Critical Breakdown For The British Pound

Includes: FXB, UDN, UUP
by: Dr. Duru


Sentiment has definitively turned south on the British pound.

Missing "expectations" on any economic data will likely continue to provide excuses to sell the pound aggressively.

Poor trading sentiment likely to persist until the resolution of Scotland's vote on secession.

Sentiment has clearly turned against the British pound (NYSEARCA:FXB). After the June manufacturing PMI produced a number of superlatives for the United Kingdom economy, the market treated this news as if conditions had finally gotten as good as they can get for now. In retrospect, the British pound essentially peaked at that point. When the July manufacturing PMI seemed to validate the notion that improvement trends have indeed peaked for now, I figured the confirmation would mark the end of the pound's plunge and mark the beginning of a trading range. Not so. A slew of economic reports on Wednesday morning (August 13th) provided the next catalyst to send the pound downward.

The British pound breaks down against the U.S. dollar

Probably most important among the economic reports was news that employment increased 167K versus "expectations" for 270K. The unemployment rate remained at 6.4%. The Bank of England also released its latest Inflation Report. I hope to review this report in detail at a later date.

The heightened sensitivity to any news that comes short of expectations could be related to the looming vote in Scotland on secession from the United Kingdom. Current polling suggests that there is enough uncertainty that Scots could vote either way. This uncertainty is not good for the currency (or the economy I imagine) given the dramatic changes that secession could bring. Moreover, the International Monetary Fund (IMF) gave an excuse to traders for selling at the end of last month. The IMF claimed that the currency is overvalued by 5 to 10% even as it noted the underlying strength in the economy. (This was news I missed until last week).

Once these ill winds pass, the pound should lift again…assuming the economy retains its strength. Rather than try to predict exactly when that might happen, I am going to hold onto most of my long British pound positions. I will next look to get more aggressively long, if still appropriate, after the vote in Scotland. My main caveat is the U.S. dollar (NYSEARCA:UUP). If the dollar resumes its recent ascent, I will feel more comfortable using it to bet against other major currencies instead of the pound.

Finally, today's surge of the euro against the pound seems to be signal enough to indicate a change in sentiment. The euro has put on its first sustained rise against the British pound in five months - trading action that looks like the early stages of some kind of bottom.

The euro looks like it is bottoming against the British pound

Source for charts: FreeStockCharts.com

Be careful out there!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In forex, I am net long the British pound.