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Pound Sterling Collapses – 1.05 Intact !

October 7, 2016

by Asad Rizvi
@asadcmka

GBP @ 1.2424 = Pounding of Pound is no surprise to me. In my July 10 2016 note, “Pound could Plunge to 1.05”.

https://asadcmka.wordpress.com/2016/07/10/pound-could-plunge-to-1-05-euro-0-9110/

https://www.linkedin.com/pulse/pound-could-plunge-105-euro-09110-asad-rizvi?trk=mp-article-card

I gave my reasoning that why I see collapse of Pound Sterling in the making that needs to clear couple of support barriers to attain my target of 1.05, which is still far away.

Pound lost over 6 pct of its value against US Dollar and briefly fell below 1.20 to test 1.1840-50 zones before rebounding, which was 31 year low (1985). Some of the financial tracking agencies are even quoting much lower levels.

However, to attain my target, it is still required to crack and close below 1.18 levels to inflict further damage to Brittan’s currency.

The reality of European exit is certainly one of the major causes, which market may have started to realize. Some blame French President Hollande’s remark for calling tough stance on Brexit as a cause for Pound Sterling’s fall.

But some are blaming “Fat Finger”, which is error by a trader that triggers “Stop Loss”. The problem is that in recent times market is largely driven by automated trading resulting glitches. Similar thing happened in 2010 US stock market crash.

However, I am of the view that last week’s BOE Deputy Governor’s statement in a Tv interview to Bloomberg said that she think Central Bank will cut interest rates to help UK economy to cope with Brexit set the downside momentum.

I think her remarks that interest rates are likely to stay low permanently because of global structural and demographic changes as BOE will create money to buy bond was damaging.

She nailed the coffin by further showing her frustration by adding that interest rates been around 5 pct for centuries, even in ancient Babylon and does not see base returning to that level soon. This is extremely Bearish and I consider two sentences as future guideline indicating the trend unless disowned.

My view on Pound Sterling remains unchanged as fall is unavoidable.

 

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

Pound could Plunge to 1.05 – Euro 0.9110 ?

July 10, 2016

GBP@ 1.2938 = The next move for Pound Sterling is completely uncertain. This is because there is so much uncertainty that n one knows that what will actually happen in coming months or years after Britain’s decision leave European Union.

UK’s political landscape after PM Cameron’s resignation has also changed. Another thing to watch will be if and when Article 50 is invoked, which is clause from 2009 Lisbon treaty, which will pave way for UK to exit.

Pound Sterling has already hit 30 year low. Now market will be looking towards Bank of England (BOE) that if it decides to cut interest rates and provide liquidity. It is because after the decision to leave EU, Fiscal targets gets tough and UK’s economic outlook is faced with more challenges.

Such a move could be possible to make UK goods more competitive that would add further pressure on Pound Sterling. This means Pound could test 1.20-22 zones against US Dollar and break of 1.18 could bring more misery for Pound Sterling, as in 1985 it fell below 1.06 levels, which cannot be ruled out, if UK unrest continues to haunt. So keep a good track of all political and economic moves for next direction.

What can cause further plunge of Pound Sterling ? The short term pain looks obvious, but any hint of recession could be the beginning of demise of Sterling. Market will also take clue from investor’s behavior after the invocation of Article 50. New General Election is another possibility that cannot be ruled out.

It seems that EU member are perusing for a quick decision. There is every likely hood that ongoing economic woes and continuation of trend could push investors to the wall and they will start fleeing, which can be large in numbers. This will be truly bad for the UK economy.

Meanwhile, nearly 4 Million voters have already signed petition to hold another context.

, there is another dimension and the leaf can be taken from the European precedent by ignoring the will of voters. In 2008, the Irish voted down the Lisbon treaty, which was adopted within few months. Similarly Greece, despite against all odds swallowed harsh bailout terms.

Brexit, is more about sovereignty than immigration, agriculture related issues or quotas. EU countries that normally respect its voters, as it listens to its population may come up with different ideas this time. Majority of its Parliament members, which believed in “Remain”, can stop Britain’s exit from EU by denying endorsement, as they have the right to disagree.

Only this can be the turning point for Pound Sterling, which could regain 20 pct of its lost strength or else, there is no bright spot for the British currency at the moment.

Is There Threat to Euro?

EURO @ 1.1048 = Unlike UK that enjoys best job condition since decade, as its unemployment rate has fallen to 5 pct is struggling after Brexit, EU countries too is faced with daunting task.

In contrast European Union has an average unemployment rate of over 10 pct, which is the result of maintaining tighter condition since 2008 and by hiking rates in 2011 it got worst. Its forceful austerity measures taken to lower down deficit and liquidity constrains added to European problems.

Unfortunately, the economic condition in 27-Euro economies vastly differs from each other and is faced with high debt problem, the risk of slow growth and recession is becoming visible.

There is a huge risk shaping up all over Europe. Scotland and Wales independence referendum is a big threat. Remember any European country that tries exit EU risks triggering another financial crisis, as common currency is proving to be pain for Euro-region managers. Minus Germany and France, the other EU members are unable to cope with strong European currency. Greece and Spain with 21 pct and 25 pct unemployment rate is hardest hit.

Euro has strong resistance around 1.1250-80 zones that should not surrender or else 1.1480, which is not a preferred scenario, but needs to fall below 1.0840 for 1.0680.

In Medium Term to long Term, a break of 1.0380 will trigger sharp fall towards 0.9880 and cracks in Euro-zone region could see plunge towards 0.9110.

GOLD @ $ 1366 = Gold is the major beneficiary after Brexit, gaining substantially. In my May 01 and June 24 note, I made strong recommendation to buy gold giving two targets $ 1380 & possibly $ 1450. This year, so far it has gained around 25 pct.

Delay by Fed in hiking rate after economic slowdown in USA gave added advantage to the safe haven commodity. This is why nearly USD 4 Billion have been invested in precious metal funds last week.

Though I am not a gold fan that offers nothing in return, but the ongoing UK and EU concerns will likely give boost to the Yellow metal in coming weeks. FED hike delay is also supportive for gold.

Hence, buy on dip remains a preferred strategy for some more weeks. Support is at $ 1310 should hold, unless $ 1250 surrenders Gold buyers will dominate for a test of $ 1440 or $ 1470-80 zones, where gold should exhaust unless $ 1540 surrenders.

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