U.S. and U.K. in Race for Widest Deficit

Fundamentally, the British Pound remains under pressure as traders arenow looking for more weakness to develop in the U.K. economy. Thelowlights this week included a record 90 billion Pound budget deficitand a contraction of the economy of 1.9%.

Besides the old news, other more serious problems could crop up next week to continue to put pressure on the British Pound.

Fundamentally, the British Pound remains under pressure as traders are now looking for more weakness to develop in the U.K. economy. The lowlights this week included a record 90 billion Pound budget deficit and a contraction of the economy of 1.9%.

U.S. Creates $100 Billion in New Debt

Next week the U.S. will auction a little over $100 billion in new Treasury debt. This is bearish for the U.S. Dollar but because the U.K. is also increasing its debt load, the race is on as to who can expand the deficit the widest. So although the increase in U.S. debt is likely to help push the Euro higher, it should have little or no effect on the British Pound. The GBP USD is moving lower on its own merits and those are an expanding deficit and a contracting economy.

What’s the Deal with the Tax Increase?

The U.K. government also increased the tax burden for high earners. This could backfire as it takes spending money out of the hands of consumers and could push the economy closer to a depression. This is not a good thing to do at this time especially since retail sales and housing prices continue to slide. Longer-term this move could trigger the exit of good business talent who figure they could keep more money that they earn by working elsewhere.

Credit Rating Services Looking for Trouble

Talk is beginning to circulate again that the Britain’s credit rating is going to get reduced. There is no doubt that the expanding deficit is catching the eye of credit rating services that stand ready to slash the U.K. credit rating at any time. Just the presence of these guys sniffing around the books will be enough to attract additional selling pressure.

Beware of Stress Test Speculation

The release of the preliminary stress test results for the top 19 U.S. banks could trigger excessive volatility until the final report is issued on May 4. Between now and then speculators can rule the Forex markets by triggering violent swings. Fear could dominate the markets sending money to the U.S. Dollar for safety as traders try to assess which banks have the capital and which banks do not. Speculators will be trying to figure out if any major U.S. financial institutions are on the brink of collapse.

The anticipated volatility will be all speculation because the preliminary reports are supposed to be a secret. Equity traders may adapt a “where there’s smoke …..” mentality and try to pounce on a banking stock if there is just a hint of a problem. This is just one of the reasons why the Obama administration wants to keep the preliminary results secret. The other is to prevent a run on a few banks. If the risk of these two events occurring didn’t exist I don’t think they’d want to keep the reports secret so be prepared.

Daily Swing Chart Still Pointing Down

Technically, the GBP USD closed lower for the week after changing trend on the daily chart earlier in the week on the break through the swing bottom at 1.4602. The current down swing from 1.5067 to 1.4397 suggests a resistance zone at 1.4732 to 1.4811. This pair tested this zone on Friday and the market broke from 1.4772. The lower close on the daily chart suggests this pair is likely to rollover to the downside. Regaining the resistance zone will be a sign the market is not ready to break.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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