Posted by Allison on 25 August 2010, 09:29
If you remember, there was plenty of volatility in the currency markets last week. If you thought you were going to get some relief this week, then you better take a very deep breath. The pound was showing signs of weakness by last Friday and this week it gave up the effort and slumped on us.
So how does a currency slump? In this case, it was without a lot of fanfare but it was on very bad news about the possibility of another recession. The pound fell against the euro, the US dollar, the Japanese yen and the Australian dollar. In other words, a lot of slumping went on the last three days.
Let’s look at what happened to make the last couple of days so painful for the pound.
If you are not a morning person then you must have been really unhappy when you heard the economic forecast by the Bank of England in the morning news. Unfortunately this great institution told us it is “putting a significant chance on the economy contracting over a four-quarter period.”
What that means in one word is...recession...another one.
No wonder the pound proceeded to slump when the economy is threatened with “real risk” of a second recession. So how far did this slump take sterling? Last Friday we saw the pound end the week at $1.551825 against the US dollar. It was holding on pretty well on Monday in the $1.55 range but by late Tuesday the 24th it was at $1.5447. In fact, at one point the slumping pound reached as low as $1.5373 which is the lowest it has seen in over a month.
But that’s not all the bad news. Plenty of analysts are saying the pound is not done slumping on us and could keep right on falling to $1.52 within the next month. It seems the technicals were telling us that a drop below $1.5469 paves the way for a whole lot more slumping.
What do you think happened against the euro? More of the same is the right answer. The pound wasn’t done slumping and hit 1.22530 by Tuesday evening.
The pound really took a beating against most major currencies as a matter of fact. It slumped as much as 1.8 percent when looking at the pound to the yen.
Now let’s look at the Australian dollars. Well yet again the pound did not fare well. Last Friday we left the pound at 1.7475. But by late Tuesday the 24th the pound was a real weakling at 1.7382. One event still impacting the pound-Aussie pair is the Australian parliamentary elections that didn’t give any party a majority.
The yen has been the currency that’s front and centre right now. Rising to a 15-year high against the US dollar at one point at 83.60 yen on Monday, it did a bit of a retreat on Tuesday to 84.36.
So what brought on this change of heart? It seems the Japanese government has finally hinted that it might intervene in the currency market. That made the yen finally take notice.
When the US is in pain, the rest of the world feels the pain too. Take the Canadian dollar for example. It just fell to the lowest level it has seen in 7 weeks against the US dollar. Canada’s loonie problem is quite sad because Canada was leading the way in the recovery area, but now everything is slowing down again including retail sales.
The pound is in very uncertain territory right now with the Bank of England issuing such dire warnings about the economy. You can read more about the BOE comments and the predictions for the sterling in a Reuters article here.
I wish I had better news to share with you, but things aren’t looking too good right now for most countries including the UK. The problem is that debt has to be reduced which means austerity measures are needed. But implement austerity measures and the economy slows. Can’t seem to win right now.
Maybe by the next report the news will be brighter. Maybe. But I wouldn’t be holding my breath because there might be some more slumping yet to go.