Oversold pound sterling offers buying opportunities
Traders ought to be seizing pullbacks in sterling to reenter the market and go
long
MoneyBlog- RATINGS agencies might have got a bad press during the financial
crisis but yesterday’s volatile moves in sterling-US dollar indicate that they
still command plenty of attention from the markets.
David Riley, Fitch’s co-head of global sovereign ratings, told Reuters
Television early yesterday morning that Britain’s coveted triple-A rating is
more at risk than that of any of the four other big economies with a top rating
(the US, France and Germany). His comments sent sterling plunging nearly 1 per
cent against the greenback in Asian trading.
Market commentators have long been arguing that Britain’s high budget deficit,
which is forecast to reach 13 per cent this year, will be bearish for the
pound. So far markets have shrugged off the likelihood of a downgrade by one of
the three major ratings agencies, but should the debt situation get so bad that
the UK loses its rating, then this would weaken sterling seriously. Was this
the start of a worrying move?
Maybe not. Analysts attributed the sharp move against the dollar down to the
thin trading that is typical of early mornings well ahead of the London open.
Such a strong slump through the old resistance level of $1.6640 – which the
pound successfully tested and broke through on Monday – would have taken out
stops placed just below and big players, who know where these stops will be,
accentuated the move further.
In fact, sterling-dollar has been steadily moving higher over the past week and
buyers swooped on the pullback in the value of the pound to take out cheaper
long positions. While there are still plenty of factors that will continue to
depress the pound – yesterday’s widening trade deficit being a case in point –
the currency has been so persistently weak that analysts are starting to call
it oversold in the near-term.
BNP Paribas’ strategists recommend long positions in the near-term to take
advantage of the current break higher, but remain cautious over the medium
term. Sterling will still struggle against the commodity currencies but its
best performance will be against the buck, with $1.70 on the cards for the end
of 2009.
Sterling also sank by a similar amount against the euro on the Fitch report,
but neither move is necessarily that significant. Saxo Bank’s John Hardy says:
“Today’s Bank of England Quarterly Inflation report will provide a more
important fundamental spark to the situation as the market has consistently
moved very strongly on every new signal from the central bank. Our longer-term
view is that euro-sterling remains overvalued.”
Whatever the longer-term impact the economic situation will have on sterling,
it is clear that there is still plenty of appetite by traders to buy into the
pound at slightly cheaper levels of around $1.66
