By: Christopher Lewis

While you weren’t looking, the British Pound has been under assault. The falling Pound has been masked by the crisis in the EU, and all of the drama surrounding it. The Italian 10-year bonds are now yielding over 7%, and the markets have been focusing on this unsustainable level as the Euro gets punished. Spain is starting to show cracks, and even the Netherlands is starting to find a bit of pressure in the bond markets.

While all of this attention was being placed on the Euro, the Pound has gotten pummeled over the last few trading sessions. The break down form the 1.60 level has shown that the momentum is picking up to the downside while most traders are focusing on the headlines.

But why is the Pound getting hit? It is a couple of reason really. The first thing you should understand is that the USD is being bought up against most currencies, and this is a “risk off” trading situation. Also, the UK is heavily bound to the financial sector in general, and the banks are in serious trouble. Add to that the issues that revolve around several British banks and exposure to its continental neighbors, and you have a recipe for a sell off.

The failure of the Europeans to come together in a forceful and meaningful manner at this point primes the USD to get bid up in general. The fact that the UK is facing massive austerity also will weigh upon the Pound as well. The bidding up of the Dollar is almost always a symptom of fear, and when markets become fearful, they don’t care that the Brits are doing much to get deficits under control. The fact is that the US is starting to decouple from the rest of the world as shown by stock returns will only exacerbate the situation going forward.

Until the EU gets the debt crisis under control, the Pound will be subject to being in the wrong place at the wrong time. By itself, the Pound shouldn’t be getting punished at the moment, and certainly not as hard as it finds itself suddenly being hit. However, in a world that thrives on fear, the Pound will suffer as much as any other currency against the Dollar until stability comes back to the markets, which looks to be some time from now.