Pound weak in anticipation of interest rate cuts

Marc Cogliatti, Currency Strategist at HiFX explains, "With both the UK and the EU having more room than the US to cut rates in coming months, both GBP/USD and EUR/USD are vulnerable to selling pressure. Sterling fared slightly worse than the Euro last night after Mervyn King admitted that the UK was entering recession and warned of further Sterling weakness.

However, the overriding force in the currency markets at the moment is the demand for US Dollars. This is a result of huge fire sales by Hedge Funds, Sovereign Wealth Funds and Investment Funds moving out of all sorts of assets in stocks, commodities and carry trades. Hedge Funds, in particular, are faced with a massive reduction in their ability to fund current investments, leading to de-leveraging on a scale we have not seen before. Meanwhile investors are clamouring to retrieve their funds before they lose their shirts. Many of these funds are Dollar based, particularly those originating in the US, Middle East, Far East and Russia, meaning that the default position is back into Dollars.

The extreme volatility has drained liquidity from the markets, with even the speculators in the Hedge Funds and Banks running for cover, leaving the market to lurch violently as every large order hits the market. What might have moved GBP/USD a cent last year is now prompting a 4-5 cent move."

The impact of this latest fall will be felt hardest by UK and European importers buying product from the US or the Far East. However, on a positive note, a weaker currency will help make exports more attractive and will certainly help that side of the economy