Is it my imagination, or have last few days brought up an increase in Pound negative rumors? I’m not talking about news, like the ones involving Prime Minister Gordon Brown and his cabinet, that calls for his head, well, resignation. No, what I’m referring to is the sudden jump in panic like statements about GBP on investment forums and news letters. They go something like “New Pounding of the Pound ahead!” or “Pound falling hard” or something like that. Typical reason given for this reasoning is the spending scandal with connection to high ranking cabinet members and, of course, increased level of public debt. This, by the way, is the very same reason behind S&P’s negative outlook for British debt from couple of weeks back. GBP shrugged that off and kept on climbing. Perhaps the debt angle is not that bad for the Pound after all? Here is a table of public indebtedness in some of the developed countries. This data was reported by IMF.

As we can see, United Kingdom is in decent shape compared to other nations shown here. Sharp increase is expected soon, but it is a common development across the world now. Even projected Gross Debt for UK looks relatively modest in relations to other major economies.
Current jump in Pound negativity is rather alarmist and largely based on few days of loosing ground to the Dollar. This could be bad if GBP was the only currency doing so, but USD strength has been much broader, effecting all majors. I suggested possibility of Dollar rebound a week ago and it is happening now. Besides, Pound, and other currencies, enjoyed a great run at Dollar expense, so some correction is normal.

GBP-USD appreciated about 3000 pips since early January. On weekly chart it doesn’t look very impressive only because preceding, panic stricken collapse. During any other time would be seem as a great bull market, which it has been. In fact, this move took the price to a major FIB level of the entire swing down, very likely area for some kind of reaction. Question now is: how low will it fall?
Some people claim this is a start of next major leg in a bear market, which will take GBP-USD to new low. I don’t see it this way, in fact this is probably very typical price development for an important bull run.

Price went as far as just under 1.6700. This happens to be a previous resistance level (A). This is a good sign, now we have even more important resistance level. Chances are high this area will be revisited fairly soon. On daily chart this could mean maybe few weeks, couple of months, but not years. Not very long term. But first, the sell off must end. Hard to say just how far this could be, most likely scenario is region noted as “Possible buy zone”. What one should look for are reversal candlesticks at retracement levels or, maybe even conjunction with 100 SMA. Based on this GBP-USD still could drop another 500-700 pips, but the uptrend should not be broken.
Another encouraging sign is that JPY didn’t move in tandem with USD. This means there in no more “safety of Japanese Yen”, and implies different market conditions that during the last year’s collapse in  Pound. As a matter of fact GBP appreciated against Yen and other currencies on Friday 06.05, eliminating the notion that Pound is somehow singled out to be a whipping boy of Forex world. Any calls for GBP demise are at least premature and more than likely grossly exaggerated.

Mike K.