The Pound Party Comes To An End
Written by A Forex View From Afar on Tuesday, February 03, 2009Even though the dollar posted some large gains last week against the majors, the pound was shielded from it, until today.
The pound rose nearly 850 pips last week, or a little more than 7%, in a time when the euro, aussie and the swissy plunged to multi-month lows, holding very closely to the current lows. The pound-buying spree came shortly after Barclays’ Chairman announced that the bank would post record revenues in 2008, despite that it refused any government aid.
Not only did the pound strengthen, but the entire U.K. financial sector was pulled higher. U.K. banks, led by Barclays, almost doubled their value in the last week.
However, the party came to an end today, when investors soon find out that things are not so rosy. Moody’s cut Barclays’ long-term debt rating two grades lower, down to Aa3. The rating agency said the bank might face another round of write-downs and losses stemming from the financial system, but the bank’s outlook remains stable, citing its strong core tier reserves. The news struck both the financial system and the pound, which tumbled almost 400 pips today before the U.S. open, during which time the European pairs barely moved.
The recent events show that the country’s financial stability has great impact over the local currency. As the credit crunch progresses, we might experience other strong declines/appreciation based on the financial system’s outlook. It should also be noted that, in the past, the euro reacted on negative news coming from the European financial system as well.
Regarding the pound’s outlook, it might now return to its close correlation with the euro and the rest of the majors. Later this week, the Bank of England is expected to cut interest rates 50 basis points, down to 1%, the lowest rate in the bank’s 3 centuries of history, something that might have a negative effect on the Sterling.
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