Independant Analyst: Lena Manousarides 22nd October

publication date: Oct 22, 2008

Pound Weakness the New Theme... 1.60 Next Target?

We are experiencing big “turbulences” in the markets at the moment, what with EUR/USD dropping more than 500 points in two days and GBP/USD even more! These moves can only be described as violent and choppy, as traders buy the dollar once again due to risk aversion.
GBP/USD fell sharply, late last night, after the speech by King, the governor of BOE which was very negative regarding the economy and the pound itself. King basically told his audience that the pound is falling big time and it will continue to fall even more in the coming days. He acknowledged the fact that the UK economy is already in recession and he said that steps have to be made soon to avoid second round effects.
The currencies that are the “flavor of the month” for traders are clearly the yen and the dollar and this is mainly due to the fact that traders get out of risky trades due to the uncertainty. Analysts predict that the situation will remain as it is for now and only something major happening in the economy can alter that. Regarding the dollar strength, another factor that might be pushing the buck higher, could be the US elections and if that comes and goes we might see greenback correcting from such extreme overbought state.
The reality is hard to comprehend when it comes to the market turmoil these days and the only wise thing to do for us traders is to either stay aside and remain aside until things stabilize or to buy the bullet and go short and follow this manic trend. Let’s not forget that in a declining trend which has really started since August especially in EUR/USD, investors are constantly searching for the best levels to go long, but that doesn’t seem to materialize so when they finally throw the towel in, at that point redemption may come!
For example, it I easy to presume that 1.30 for the EUR/USD was a good support level and 1.2850 even better to work as a bottom, however in the current conditions that doesn’t seem to apply and these levels can easily break with 1.26 to be maybe the next target. In the monthly charts, the 1.2725 have been reached overnight, which was the lower Bollinger Band and therefore one could say that we might see now a correction from there. All possible that’s for sure, however before we rush to buy the euro lets first see some kind of reversal signal.
Today the calendar has no important news out of US, apart from the oil inventories, however we had the BOE minutes from the last meeting which showed that the rate cut was unanimous and the members of the bank clearly have said that the inflation is still a threat to the economy and more cuts shouldn’t be taken for granted. The outcome is not in the same line as yesterdays speech by King, however it managed to lift the pound up from 1.6230 to 1.64.I cannot personally see any reason for now to buy the pound but only to wait for bounces up in order to sell again for 1.60 the possible target. As long as the pair trades below 1.68, there is further scope for losses.
Let’s see how New York reacts to all this, and if the drop in both euro and pound continues, however in such extreme environment it’s better to be safe than sorry and only take small positions as the whipsaws can easily turn around and bite you…