The Plight Of The British Pound

The Bank of England will probably cut interest rates to 1% at midday today.I expect that the nine-members of the Monetary Policy Committee will cut the bank rate by a further 0.5% to 1%. This will be the lowest interest rate since the Bank Of England was founded in 1694.

The Bank of England rate is currently 1.5% after the BOE reduced rates by 3.5 percentage points since October. In the US, the Federal Reserve has already reduced its rate to a range between zero and 0.25 percent. I expect that he European Central Bank will keep its rates on hold at 2 percent today.

The plight of the pound still looks bleak even though we have seen some relief rallies over the past week or so. Currently the long term trend is down for the Pound and this looks as though it will remain the case for some time to come. Certainly the market is looking for rate cuts and these to an extent will already be priced in to the market.

The March contract hit a low of $1.3492 on the 23rd January and this level may well provide support should the market decline to this level. On a longer term chart this level also produced support back in 2002. If support at $1.35 fails then a decline to $1.25 may be seen.

Further out the Bank Of England may continue to cut rates to near zero in line with the US. This is only likely to send the pound lower as interest rate differentials is a key factor to currency trading.

The pound has fallen 16% against the Euro and 27% against the US Dollar in the past year and is also down 32% against the Yen. The short Pound/Yen trade was our second best trade of the year in 2008 as we caught most of the decline.

Currently we have no trades on the Pound against either the Yen or the Dollar as we wait for the next signal. As the long term trend is down, I don’t see us having any buy signals on the Pound any time soon.

Good luck in your trading

Phil Seaton

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