The Future of the Pound

During the past few months the currency markets have been extremely volatile, especially in the crosses involving the Euro and the British Pound. Both currencies have been down sharply against the Unites States Dollar starting in the latter half of 2008. The Euro continued to sell off throughout 2009, and hit multi year lows during mid June 2010. The Pound however has recovered a little against the U.S. Dollar, during the second half of 2009. Since the beginning of the year it has since lost its momentum and continued it longer term trend downward.

At the moment the GBPUSD pair is trading at around 1.48 versus the U.S. Dollar. Looking at the technical indicators, the price will face upward resistance at around the 1.55 price range. If it breaks higher above that mark, it could go as high as 1.70. However this is unlikely in the near term, and even the long term. The 1.70 price was reached back in the later stages of 2009, and the price was a lower high that failed. Combining technical support and resistance with the fundamental outlook for the British economy, will help to give the investor a good idea why the price of the Pound will more than likely head lower.

In recent days British Petroleum, know as BP has received calls to cut its dividend to investors. The cut would make it so that money that would go to shareholders will be put towards a cleanup fund. The problem with this is that many British pension funds are invested in the BP stock. Since the start of the crisis in the Gulf of Mexico, the company’s stock has lost half of its value. This will directly affect the funds and personal accounts that are invested in the stock. If they cut the dividend, that would add more monetary loss to the already hurting funds. This could have a direct effect on the British economy, as its citizens will feel as if they have lost money and cannot afford to spend. Spending drives economic growth, which in turn would help the currency appreciate. If we find that spending is down across England then the currency has a better probability of going lower against the U.S. Dollar.

Another issue that could lead to further Pound depreciation is the fact that BP pays a substantial portion of the overall country’s taxes. If Britain does not take in tax revenues it too must lower government spending, thus hurting economic growth. As I mentioned earlier the British pound has been in a downtrend since the end of 2008, with a brief rally during the second half of last year. The news coming out of England has not been positive which will only put pressure on their currency. The previous support price for the GBPUSD was at 1.35. This low was most likely linked to the overall credit crisis where several British banks had to take loans from the government to stay solvent. As of now those same banks are not as healthy as they need to be. The banks bought, just like all major U.S. banks, many toxic mortgage backed and asset backed securities that lost most of their value throughout 2009. The values of these assets have not recovered, and as a result the Bank of England has kept and will continue to keep interest rates at record lows for the foreseeable future to help the banks return to profitability.

All these negative forces are working against the appreciation of the Pound. The next few months will be critical for BP. If they can continue to pay their dividend and their stock price rises, than that should help give positive news to all the investors and pension fund who own stock in the company. If they cannot contain the leak then the stock could fall further, bringing bigger loses to both investors and the government. The British banks are still not fully recovered and will remain wounded for the next few years, as they slowly write off losses from sour mortgage securities. I do see the Pound trying to re tests its lows around 1.35 versus the U.S. Dollar within the next 12-18 months. Hopefully this will not be the case but the odds are stacked against the country and the currency at the moment.

This article was written by guest author Vincenzo Desroches

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