GBP/USD is back below 1.50 today after Fitch sais the country’s sovereign credit profile has deteriorated and that stronger fiscal adjustments are needed among AAA nations with urgency in UK, Spain and France.
The decline was further compounded by a disappointing trade balance figure and a fall in the RICS house price balance to +17% from +30%.
Aside from these day-to-day factors, the big decline in cable over the past three months has had a lot to do with the political situation. The market is pricing in a hung UK parliament following the spring election. The sentiment is that gridlock will lead to more spending and that no consensus for deficit cutting will emerge.
We are beginning to see this move as overdone. Democracy will continue to function in the UK and the deficit will be reigned in long before there is a sovereign crisis. In the meantine, we are down about 2000 pips from the November highs.
In January we had a bounce to relieve oversold conditions and the support at 1.4787 could be setting up a similar move. In fact, we aren’t even expecting a retest of 1.4787 and will be putting our stops at 1.4850.
A reasonable target for a bounce in GBP/USD is the mid-Bollinger, around 1.55.