Fundamental Outlook for British Pound: Bearish

- British Pound Tumbles as Bank of England Cuts Rates, UK announces bailout
- Worst stock market crash in recent history sends the risk-sensitive GBP reeling
- Interest rate and technical outlook point to further pound losses

The British Pound tumbled to end the week’s trade, as the worst single-week stock market performance in recent history sent the risk-sensitive currency to fresh five-year lows. Panic across financial markets had a particularly pronounced effect on British Pound/US Dollar and British Pound/Japanese Yen currency pairs, as a flight to quality sent traders piling into the “safe-haven” US and Japanese currencies. Whether or not global financial markets may recover will likely be the primary driver of GBPUSD and GBPJPY volatility, and it will be important to watch how Asian financial markets react to a recent G7 statement addressing the ongoing financial crisis.

The Group of Seven (G7) announced that it would take “decisive action” in its attempts to support key financial institutions and “take all necessary steps to unfreeze credit and money markets”—ostensibly bullish remarks from the powerful group of world finance ministers. Yet the group’s failure to back their rhetoric with concrete actions could potentially leave markets under pressure through Sunday night’s Asian market open, and it will be very important to see how markets react to the news. As it stands, the British Pound continues to trade in a virtual free-fall against the Japanese Yen and similarly pronounced downtrend against the US Dollar. The Bank of England’s recent rate cuts and UK government’s announced bailout of major financial firms has done little to pacify British Pound markets, and one has to wonder whether any amount of government action—be it a unilateral UK attempt or G7 coordination—will be enough to satisfy panicked traders.

We can never rule out a short-term correction of British Pound weakness, but medium-term bearish momentum favors further losses in the GBPUSD and GBPJPY. A sustained GBPUSD break below the historically significant 1.7000 mark would open up a move towards key Fibonacci support at 1.6160—the 61.8 percent retracement of the British Pound’s 7-year rally from 1.3700-2.1100. The 61.8 percent mark is typically considered the final major defense of a previous trend, and a move below 1.6160 would signal that the British Pound’s 7-year uptrend against the US dollar is officially over. We will not get ahead of ourselves in predicting a decline below 1.6160. Yet it remains clear that fundamental and technical momentum remains to the downside for the recently-downtrodden UK currency, and our longer-term forecast remains to the downside for the British Pound/US Dollar exchange rate.

David Rodriguez is a Currency Analyst at FXCM.