The Pound Is Overvalued Against the Dollar

Although the cable has fallen more than 10% since the start of the year, taking many traders by surprise, more and more analysts are coming to the conclusion that the pound is still overvalued. The problems with the U.K. economy have been well documented. The horrendous housing market that is in its worst downturn in almost 18 years has spilled over into the broader economy, which, depending on who you listen to, is either in or is on the brink of a recession.

Inflation continues to be problematic, increasing to 4.4 percent in July, handcuffing the BOE into leaving interest rates unchanged. The outlook for the U.K. currency is not good. The cable gapped up approximately 100 pips at the start of the Asian session yesterday, but has since closed the gap and is trading below Friday’s close, testing Friday’s low. 

Traders sometimes have a tendency to overlook the facts and trade on speculation. In the case of the Gbp/Usd it is easy to think that the pair has dropped too much, too fast and that a reversal is imminent.

While the relative strength index is well into oversold territory, and bounces will happen on decent economic news from the U.K. or poor economic news from the U.S., trading the pair long is against a strong trend and against what the U.K. government is telling us, that Britons are facing the biggest slowdown since World War II.