A heart stopping week for currency traders
It was another quiet week on the equities front. As we write this piece the Dow Jones is trading 70 points or 0.7% higher than the previous Friday’s close. While trading on the equities has been marked by low volatility, the same was not true for currency markets which once again proved very volatile. The euro, which started the week poorly, managed to erase those losses as the days progressed and news from Greece was well received. However, the real excitement was for those trading sterling (GBP).
On Monday morning sterling took a massive nose dive. At 9:30 GBP/USD was trading at $1.5160 but just two hours later it had tumbled 370 points to a low of 1.4790. A 2.4% move in such a short space of time is quite rare, but there was some important news over the weekend which was giving traders plenty to think about on market open.
From a bigger picture point of view the U.K.’s public finances are in dire straits, and there is continued speculation that its AAA credit status is in danger. News from the election polls over the weekend indicated that the U.K. may be faced with a hung Parliament after the general election in three months time. This left investors worried that such an outcome would not be conducive to a clear plan to tackle the fiscal issues. On top of this the British insurer Prudential announced its plan to purchase AIG’s Asian operations for $35 billion, $25 billion of which would be paid for in cash. The U.K. insurer will have to sell pounds to purchase these dollars and this would naturally put some pressure on cable.
There were some economic figures released at 9:30, but these were broadly in line with expectations. It seems that currency traders were waiting to sell after all the news at the weekend, and the uneventful figures were seen as the perfect time. Once the heavy selling started it is probable that many speculators who were betting on the GBP/USD increasing were closing out of their long positions, thereby adding momentum to the move down, particularly once the $1.50 level was broken.
During the next few days of trading, GBP gradually clawed back much of its losses and the GBP/USD was trading back above $1.50 on Wednesday morning. The panic at the start of the week has been put to one side for the moment, but Monday’s move is indicative of the fragility in the pound. However, this fragility and the accompanying volatility offer plenty of opportunities to a nimble trader.