British Pound Undermined by the Bank of England, Sterling Bear Market Resumes

By: Nadeem_Walayat

The Bank of England and Mervyn King's recent announcements in the mainstream press have clearly been aimed at sending the markets a signal that official policy favours a weak currency so as to support the economic recovery by boosting the export sector. The reaction in the markets was for a swift drop in the exchange rate across all major currencies and most notably against the Euro which triggered a fall of over 8% from the recent high of 1.20 to below 1.10

Following the fall in the Sterling to £/$ 1.62, Mervyn King stated :

“The fall in the exchange rate that we have seen will be helpful to that process but there’s no doubt that what we need to see now is a shift of resources into net exports – whether directly or in producing things that compete with imports.”

The resumption of the sterling bear market against all major currencies that are themselves engaged in a programme of competitive devaluation is inline with my analysis of the past 2 years following the peak of sterling in December 2007, that ever escalating measures to bailout the banks and stimulate an economy entering first recession and later depression would result in ever larger increase in the debt that tax payers would be lumbered with, far beyond that which the chancellor was estimating way back in November 2008, which prompted in depth analysis - Bankrupt Britain Trending Towards Hyper-Inflation?

The below debt and liabilities graphs illustrate the reasons why the sterling bear market has a long way to run which targets an eventual break below the 2008 low of £/$ 1.36.

Despite recent political rhetoric the politicians have yet to come clean on the degree of spending cuts and tax hikes necessary to narrow the budget deficit that projects to an average £150 billion per year for the next 4 years. This is not sustainable as I have repeatedly pointed out in in-depth analysis over the past 2 years as below selection illustrates -

• 22 Aug 2007 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth
• 11 Nov 2007 - Impact of the Credit Crunch on UK Borrowers Debt Mountain Going into 2008
• 18 Jul 2008 - Brown Breaks Another Golden Rule, Real UK Debt Above 40% of GDP
• 24 Nov 2008 - UK Government Debt to Double, Tax Rises to Follow Tax Cuts
• 28 Nov 2008 - Bankrupt Britain Trending Towards Hyper-Inflation?
• 22 Apr 2009 - UK Budget 2009 Debt Deficit, Basic Rate Income Tax Could Rise to 30%
• 23 Apr 2009 - Darling's Recession Debt Crisis Budget, Britain's £1.2 Trillion Public Sector Black Hole
• 31 May 2009 - Labour Governments Bankrupt Scorched Earth UK Economy for the Conservative Government
• 03 Jun 2009 - UK Economy Set for Debt Fuelled Economic Recovery Into 2010 General Election
• 11 Jun 2009 - Bankrupt Britain's Public Sector Double Dip Debt Recession on Deep Spending Cuts

The consequences of NOT effecting deep cuts in public spending AND raising taxes that narrows the budget deficit to under £40 billion per annum is that the unsustainable deficit could trigger a currency collapse and ignite hyper inflation. However cutting the budget deficit and sparking a double dip depression would also hit sterling therefore a lose, lose situation.

The British Pound is clearly discounting forward relative economic weakness which implies more quantitative easing and cuts on the interest rates paid to the banks on reserves parked at the Bank of England, so as to force the banks to take risks by increasing lending which they are not doing - Bailed Out Banks Not Lending, Sitting on Tax Payers Cash

British Pound Technical Picture

Sterling hit the contra trend rally target of £/$ 1.70 in early August after which it has been in a downtrend that has brought it to support at 1.60. At the moment the currency remains in a shallow down trending channel that continues to project towards a target of £/$1.55 by the end of October. The clear risk to sterling is for a break below the down sloping channel that would see a steeper drop to £/$ 1.50, which is my favoured expectation for sterling to reach by the end of October, which is also inline with my strong dollar expectations U.S. Dollar Bull Market Trend Forecast 2009 Update. However £/$ 1.50 would in my opinion be just a stepping stone enroute towards an eventual break of £/$ 1.36.

Ensure that you are subscribed to my always free newsletter to receive in depth analysis on UK house prices and also in the works a forecast for the UK economy covering the next 10 years.

By Nadeem Walayat http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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