GBP Fundamental Analysis 28 July 2009

By William Doody
The British Pound strengthened against both the U.S. Dollar and Japanese Yen on Monday, as traders again moved away from safe-haven currencies after better-than-forecast home sales data was released in the United States. The Pound bought $1.6493 and ¥156.98 against the two currencies, an improvement of 0.4% and 0.8% respectively. The Pound continues to benefit from the perception that an economic recovery is gaining momentum, especially in light of several good corporate earnings reports and a number of positive economic surprises. Despite its recent success, we remain pessimistic about the British Pound. We view the U.K. as the weakest of the major economies, and recent poor economic data appears to confirm that belief. For now, the Pound is appreciating as traders take on added risk in their portfolios and sell the Dollar and Yen to fund those positions. Looking ahead, however, we believe that currency markets will increasingly demand evidence of economic strength. For the moment, at least, Britain is lacking in this regard. Thus, over the next several months, we see the Dollar gaining ground against the Pound.

For the short term, however, we believe the Dollar will continue to trade inversely to equities and to the perceived strength of the U.S. economic rebound. For this reason, the Pound may continue to do relatively well over the next several weeks, and perhaps until the end of Summer. Still, we would encourage traders with gains to take profits. The calendar for economic releases in the U.K. is relatively light this week. Mortgage approval and consumer credit data will be announced Wednesday and consumer confidence results will be released on Thursday.