Pound Slammed Once Again as Focus Turns to G-20

09/25/2009 12:01 am EST

Focus: FOREX

Boris Schlossberg

Managing Director of FX Strategy and Co-Founder of BKForex LLC, BK Asset Management

The pound was hammered in early-London trading Thursday on the back of dovish comments from BOE chief Mervyn King and end-of-month demand for the EUR/GBP cross, while other majors treaded water with economic data providing little surprise to the market. The Nikkei played catch up after three days of holidays, rising more than 1%, but European stocks were lower in the wake of softer-than-forecast IFO and general profit taking that carried over from yesterday’s US session.

In the UK, Mervyn King’s remarks that weaker sterling was necessary for rebalancing of the country’s economy towards more exports sent the pound tumbling nearly two full cents in early-London trading as specs were once again caught flat footed. Yesterday, we noted that a 9-0 vote by the MPC to maintain the QE program at current levels “was a sigh of relief for pound bulls and may remove some of the selling pressure that has dogged the unit for the past several weeks.” But, the bounce lasted only 24 hours as Mr. King once again demonstrated to the market that the BOE is perfectly content with a lower currency exchange rate and is unlikely to initiate any type of tightening into its monetary policy for the foreseeable future.

Meanwhile, the EUR/USD held ground at 1.4750 after yesterday’s profit-taking selloff dropped the pair into the 1.4600 handle. On the economic front, the IFO printed a bit softer at 91.3 versus the 92 forecast, but still beat the last month’s reading of 90.5. Like virtually all the recent EZ economic data, IFO continued to show an improvement, but at a slower, more gradual pace than the rebound off the lows in Q1. IFO President Hans-Werner Sinn noted that, “Appraisals of the business situation and outlook have improved. However, by far the greater number of firms still assesses the business situation as poor."

The euro saw little market reaction from the news—which offered no fresh information to traders—but remained well supported by EUR/GBP flows, which took out the key 9100 level in the aftermath of Mr. King’s commentary. We noted yesterday that, “The long term picture continues to favor the euro with the EZ region showing better economic growth than the UK and trend for EUR/GBP remains to the upside.”

By Boris Schlossberg of GFTForex.com

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