The British Pound Gets Pounded

Tomorrow, I'll fly to London, a place I visit often on business. For many Americans, London has been as expensive place to visit during the past few years, but it's becoming cheaper by the minute as the British Pound has plunged beneath $1.63.

This represents a drop of 48 U.S. cents since the Pound peaked at $2.11 back in November. That might not sound like much, but in the highly leveraged world of Forex trading, it is a huge move of 4800 pips. A big chunk of that move, about 1000 pips, has occurred over the past three days.

What is wrong with the British Pound? Well, Prime Minister Gordon Brown has made it clear today that the U.K is heading into a recession, echoing comments made earlier this week by Mervyn King. King, the Governor of the Bank of England, also commented that the U.K.'s banking system was closer to collapse earlier this month than it has been since World War 1.

The amazing collapse of the British Pound has unwound most of the currency's gains for this decade against the U.S. Dollar. Measuring from the low point of June 2001, when the GBP/USD pair reached a nadir of $1.36, and the highs of November 2007, above $2.11, the pair has lost more than 60% of this decade's gains. It smashed through Fibonacci levels all the way down, falling like a piano pushed off of the top of the London Eye (see figure 1).

Figure 1: GBP/USD breaks all major Fibonacci levels on the monthly chart. Source: Saxo Bank

So where will the Pound go from here? Major support is located in the $1.55 area, which last acted as support in 2003. The rate of decline here is astounding, and traders who buy GBP right now might be catching the proverbial knife. I'll short rallies, if there are any to speak of.

If the entire civilized world is falling into a recession, why is the Pound taking it on the chin? The Bank of England's Monetary Policy Committee has simply been too slow to cut the U.K.'s benchmark interest rate, which remains at 4.5%. The MPC's reasoning is that it must control inflation, but with world markets collapsing and crude oil falling below $70 per barrel, the pendulum has shifted and the time for action has come. In my opinion, the MPC should immediately cut by another 150 basis points, but that's highly unlikely. I'm looking for more downside on the Pound.

One final note, I'm scheduled to appear live on CNN Business International on Monday, Nov. 27. See you then!

Ed Ponsi is the President of www.FXEducator.com and www.EdPonsi.com. He has appeared on CNN, CNBC, the BBC and Fox Business News, and is a frequent guest lecturer at trading events and seminars around the world. Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ponsi is featured on the FXEducator.com DVD series, Forex Trading with Ed Ponsi, and is the author of the best-selling book Forex Patterns and Probabilities.