Has The British Pound Already Hit Bottom?

Has The British Pound Already Hit Bottom?
Jonathan Hobbs, CFA

over 1 year ago1 min

In news that’ll surprise no-one, the pound has taken a beating as grey clouds hang over the UK economy. But there are technical signals that suggest the worst might be over, at least for now.

Each green and red bar on the chart represents one week of movement in the value of the pound priced in dollars. There are three things here that suggest investors have “capitulated”, meaning they threw in the towel at the worst possible time, losing the most possible amount of money. And that’s typically what happens when prices hit bottom.

First, the sterling’s drop from $1.14 to its all-time low of just under $1.04 happened in less than two weeks last month. That’s extreme for developed market currencies, which sometimes don’t move as much in a year. Second, the pound got bought up really aggressively after that plunge, finishing the week at around $1.11 – almost 8% higher than its actual low. That shows renewed buying interest in the currency. And third, the whipsaw move all happened with the second-highest trading volume ever recorded (white and gray bars). That suggests a ton of investors jumped ship as the price moved around.

So, the question is: what happens next? If the UK pound has indeed hit bottom, it could still linger at these levels for a while as volatility cools off – and it could even try to retest that record low before starting a new upward trend. But capitulation theories aside, it’s still worth keeping an eye out for better news about the UK economy. The pound's not likely to break too much higher without it.



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