A Dead Cat Does Not Bounce

18, September 2009

The pound is under intense pressure this morning falling to 1.10 against the euro and slipping against the USD. The pound has not been helped by wobbly risk sentiment, but the main damage seems to have been inflicted by an article in the Telegraph.

The paper reports Lloyds Banking Group has been forced to abandon it’s plan to withdraw from the Government’s toxic debt insurance scheme after failing to raise enough capital to meet the FSA’s strict requirements. As we experienced previously jitters in the UK banking sector hurt the pound and given the bad sentiment already surrounding the pound it is no surprise to see it fall on this news.

Among the other factors weighing on the pound are the likelihood of early move by Bank Of England to cut deposit rate paid on bank reserves, the likelihood of additional Quantitative Easing coming soon and of course dire public finances.

The recent rally in the FTSE will have provided the pound with some support The concern is that if equities sell-off the pound could drop further. We need to see some consolidation over the next few trading sessions to support the pound. The better than expected public sector net borrowing data gave the pound a reprieve this morning and it has edged up from the lows but a dead cat does not bounce.

Yesterday we saw some respite in the selling of USD with a little US dollar strength coming back into the markets against the euro, pound and Japanese Yen. Equities struggled a little yesterday too and this could be a sign that the recent push to sell USD is starting to look tired.

Report by Phil McHugh.

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Compiled by Tom Nadir.

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Posted in The Market Club Tagged: Bank of England, Business Trading, Currencies Direct, Japanese Yen, Personal Trading, Phil McHugh, Quantitative Easing, the euro, the pound, the USD