British Pound Selling Takes Market Lower

The Bank of England's release of the Monetary Policy Committee's (MPC) notes is cited as a major reason for Wednesday's sell off. By a 9 to 0 consensus, it was decided the BoE would increase their asset purchases by £50B, expanding the potential money supply, and trying to stimulate the economy. This decision had been previously announced February 8th, but the surprise for the market Wednesday was that two members advocated an even larger increase in the bank's purchases.

We had suggested in an article published prior to the report the British version of QE would prove negative for the pound and a short above the 1.59 was warranted. Granted, had you been fortunate enough to get short at those levels, the trade took a while to develop.

The timing of the sell off yesterday is curious. One of the financial papers suggested because two MPC members voted for an even bigger expansion of assets, a further increase may be forthcoming later this spring. Perhaps, but there may be more at play here.

The pound has been supported because it was not the euro. Those fearing a messy outcome from the Greek negotiations may have bought some sterling for safety. Observe the EURGBP chart and note that the euro gained sharply on the pound Wednesday, eclipsing all the trade going back to the middle of December. The end of another act in the Greek saga may be causing some liquidation of safe haven pound longs.

There are some other issues working against the pound. Economic activity in Britain has been slow. On Friday the revised q/q GDP will be announced, expected to be a 0.2% contraction in the last quarter. Looking ahead the economic blight being spread by austerity measures in Europe, will slow British exports in that direction.

Gordon Brown, Britain's former PM, had some observations in yesterday's Washington Post,

Europe's shortsighted response to a worsening fiscal reality...........the unfolding tragedy of a bankrupt Greece is only a symptom of an even more fundamental miscalculation: a wrong-headed conviction, widely held across Europe, that if austerity is failing, it is because there is not enough of it.

Already the half of the euro zone that is in recession threatens to bring down the other half...... Another downturn could condemn the continent to perhaps a decade of misery, with low growth, high unemployment and social unrest. It would destroy Europe's pivotal position as the world's second-largest engine of growth, and condemn the euro zone to permanent decline and marginalization from the wider world, severely damaging international trade and curtailing global growth for at least the rest of the decade.

Well spoken. These insightful comments make more sense than those coming from the current European leaders. Britain, though not in the euro, will pay a price for their decisions of others.

Wednesday's sell off in the pound seems severe, but we do prefer the short side. A rally back to 1.5750 seems like a good entry level. Britain does have some problems, but her biggest may be the slumping eurozone.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.