The destiny of British Pound By Dr. Bobby Srinivasan and Chandan Palaksha

October 18, 2016 | Posted by bobbysrinivasan << back to blog

Situation

Currently there appears to be no bottom to the value of British Pound. Trading around 1.75 for a dollar a few years back it is currently struggling to stay above the 1.20 level. Even banana republic currency don’t drop 50%. What is ailing Britain? Why have the citizens of this country chosen hara-kiri as a way to survive in the global economy? Hedge funds and traders are all having a field day selling the Pound ferociously. The Central Bank of Britain looks like a lamb about to be attacked by a hungry tiger. Will the international financial community collude together to salvage the value of Pound? In 1985 after the Plaza accord the US dollar was pounded by its trading partners to bring down its value, of course with the approval of US.

The uncertainty created by the impetuous action by the majority British citizen has caused so much havoc that in a short period of time of three months the value of the Pound had plummeted from 1.49 to 1.21 to a dollar. One of the US Presidents on a different occasion quipped and I quote, ‘you want to destroy a country. Just destroy the value of their currency and this will promote a civil war’. This is what is happening in countries such as Argentina and Venezuela currently. In the case of Britain it is a self-made destructive path.

Observation

Prime Minister Theresa May addressed the British Parliament recently promising what wonders Brexit can do to the British economy. As she spoke the value of pound plunged to hit a 30 year low. She may have convinced the people about their country’s future but the market wouldn’t buy it. To add fuel to the existing fire President Francois Hollande made an open statement that the British have to suffer the pain for the action they have chosen. Everywhere in the market place you hear the voice ‘sell the Pound until the cows come home’.

Strategy

It is too late in the game to chase the Pound in a downward swing. Wait tell it bottoms out before you buy. Drop from 1.49 to 1.21 in the near term is too much variation. Pound value will stabilise around the 120 level and will move upwards. The current price reflects all the bad news. But don’t count on its complete recovery. Watch it in conjunction with the euro which is trading around 1.1080. It has already dropped from 1.1350. The employment figure for October 2016 which will be announced on November 4, 2016 will be critical. If the job creation number is lower than 150000 per month which the long term average the Fed may not increase the rate. Then the Pound will recover in value.

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