Weekly Markets Diary - FX

GBP/USD - Daily Chart

After the remarkable moves in the pound in recent days there really was nowhere else we could look for our weekly FX review.  

We mentioned a few weeks ago that calls for the pound to fall to parity had grown louder. But no one can honestly say they expected moves down towards this key psychological level so fast.

The spike down on Monday morning looks to have been heavy institutional selling into relatively illiquid overnight markets. This leads some to call it a near “flash crash”.

This issue is that flash-crash events like this demonstrate the level of institutional selling and show they released it into the market too fast. Often with sharp moves like this it turns out to be case of “too much too soon” rather than a complete mistake.

The cat is out of the bag

So even if the pound is able to continue the minor recovery from these lows, the cat is out of the bag. Heavy institutional pressure is waiting to hit the bid.

The silver lining is that price action did not collapse all the way to parity yet, it “only” fell to record lows.

It is worth remembering that in summer 2007 the GBP/USD was 2.000. Recently, former US Treasury Secretary Larry Summers did not mince his words in a Bloomberg interview, where he stated that a move to parity for the pound is on the cards and that in the future “the UK may be remembered for having pursued the worst macroeconomic policies of any major country in a long time”.

While the UK economy continues to struggle, the cost of living crisis continues, general inflation persists, the central bank remains behind the curve, and government tax cuts spook the markets, it is difficult to see much longer-term buying momentum emerging.

This leaves a call to parity on the pound as the obvious next natural target in the months ahead. Considering the dramatic moves of recent days, it could possibly be even faster than that.