Are Weak Fundamentals About To Punish The Pound?

One of the more vexing bullish runs in the currency exchange market over the past several months has been the stridently bullish move made by the British Pound against the U.S. Dollar. This move has likely confounded more than a few fundamental traders that expected Sterling to suffer at the hands of some of most dour economic news in the developed world. There is no getting around the fact that the global recession has cut deepest in the U.K. where financial institutions and the housing sector deteriorated at such an alarming pace that it made the same problems in the States look tame by comparison.

The Pound seemed to shrug off those issues as if they didn't exist. Trading below 1.40 in early March, GBP/USD rallied hard and fast to challenge an important psychological resistance level at 1.70 earlier this month. Once 1.70 was within sight, the Pound started to fail and has retraced back to just below the 1.62 level, finding support around 1.6198.

As we said, it's hard to pinpoint exactly why the Pound took off so mightily against the Dollar, but if we had to guess it might be more a testament to dollar weakness than Sterling strength. Certainly, the recent rally in U.S. equities renewed risk appetite to some degree and that usually leads investors to bail on the Dollar and seek riskier fare, of which the Pound could be considered. With the tepid gains posted by U.S. equities last week and a host of economic data coming out this week from the U.K., now appears to be an ideal time to be bearish on GBP/USD.

Support in the 1.66 area has already been broken and if 1.62 can't be held, and that doesn't appear all that likely, break below 1.60 becomes possible in the near-term. Again, this isn't so much a commentary on Dollar strength, of which there is little, it merely the reality of what happens when equity markets take on a lethargic feel, which they have done. Given that the Labor Day holiday is right around the corner, another mild week is probably in store for equity markets all over the world. The bulls need to take a rest and the bears will probably lack sufficient ammunition to assert noteworthy pressure on stocks.

It is worth noting that a somewhat last week's positive U.K. GDP update failed to inspire forex traders to remain bullish on the Pound and with housing and PMI data littered throughout the coming week, fundamentals could finally be coming home to roost with the Pound. All of this said, we cannot forget to mention one major catalyst that could spark volatility in both equity and forex markets this week. The U.S. unemployment report is released on Friday and if the news is positive (meaning less bad than previous months) all bets for GBP/USD could be off and a bullish move could be in the offing.

If we do see a bullish move in stocks on Friday, it could serve as mere band-aid for the Pound, which is starting to look it needs much more advanced treatment to surpass 1.70 against the Dollar.