A Falling Pound

Excerpts From FXStreet.com

British Pound in for a Sharp Fall?

by Bryan Rich

Read the entire article here:
In my December 26 Money and Markets column I focused on the outlook for 2010, and the looming threats to global risk appetite. I warned that sovereign debt problems posed a major threat to global economic recovery. And I concluded that this threat represented a catalyst for a return of global risk aversion.
I also said that in a global crisis, these sovereign debt fears have the ability to be contagious. Such fears can destroy investor confidence in the capital markets of troubled countries, as well as in the overall global economy.
And when confidence wanes, capital flees … a surefire recipe for falling dominoes. That’s especially true in the wake of a deep global recession that has left many countries with bloated deficits and debt loads.
Despite the European leadership’s attempt to lessen the sense of urgency in the euro zone and despite the ambitious plans rolling out to shave outsized deficits, the problems with governments’ finances are not finding a resolution.
More likely, it’s just the beginning of another major destabilizing force for the global economy. And the result is looking more like another bout with recession … or perhaps depression.
Here’s a brief look at how the dominos are setting up to fall, and ultimately why I think the British pound is the next vulnerable currency, as fear and instability spread from country to country.
Falling Domino #1: Dubai, the Wakeup Call
Falling Domino #2: Greece, Next in Line
Falling Domino #3, #4 and #5: Portugal, Ireland and Spain The Next Troubled Spots
Greece isn’t the only euro-zone country in trouble … Portugal, Ireland and Spain all have severely bloated deficits and debt levels. That puts them in violation of European monetary union (Emu) guidelines, not to mention diminishes their outlook for economic growth — a tool desperately needed to start dealing with their red ink.
Consequently, the ratings agencies have put these weak countries under the magnifying glass. And ratings and outlooks have been downgraded. For example, Spain, the third largest economy in the euro zone, lost its AAA rating in January.
Falling Domino #6: The UK, Looking Grim
The next, most vulnerable and biggest domino in line to fall is the UK. Among G-7 countries, the UK has the weakest performing economy, the largest deficit and the worst deterioration of its debt position.
As conditions get worse in the euro zone and it becomes increasingly evident that there are no clean fixes, the UK is the most likely candidate to come under the gun.
The British pound plunged to its lowest level in 24 years against the dollar at the height of the financial crisis … now just a year later it appears another test of that level is in the cards.
And that’s where the outlook for the pound looks grim. Already, this week, negative forces have gathered against the pound taking it to its lowest level vs. the dollar in more than ten months!
So while the uncertainty about the UK government’s finances continues to build, I expect the pound to be the next victim of currency speculators.
Falling Domino #7: The U.S.? In the Crosshairs

As we discussed in several earlier posts here and here, an number of analysts are concerned that the British Pound is heading for a fall.
We have been concerned about the Pound for some time as UK deficits mount and the public seems resistant to austerity measures.
Our view remains that equities will likely face a sharp pullback when the next crisis begins, possibly a currency crisis centering on the Pound.  We anticipate that the US dollar will rise in the face of the next crisis as most other currencies fall.  
As a result, we expect crude oil to pull back strongly to the $50 to 60 range.
In our view, gold and silver will pull back to major support and represent an excellent buying opportunity.
The timeframe of these events are difficult to judge, while it is possible that a trigger could be initiated in March, we anticipate a 4 to 10 month window is more likely.