Election Risks, Debt and Inflation Push British Pound Below £/$1.50 Towards £/$1.40 Target
ElectionOracle / British Pound Mar 02, 2010 - 01:19 AM GMTBy: Nadeem_Walayat
Sterling hit a new low for the year against the U.S. Dollar of £/$1.49, now having fallen by more than 10% from a high of £1.68 just a few weeks ago. The mainstream press has scrambled to explain the fall away as a consequence of the narrowing in opinion polls between Labour and the Conservatives that over the weekend showed the lead shrink to between 2% and 5% and therefore put the election into hung parliament territory (Labour has a in built 4% advantage over the Conservatives).
Sterling's downtrend may have come as a sudden surprise to many in the press, however the trend for sterling was accurately mapped out in December 2009 (British Pound GBP Forecast 2010 Targets Drop to Below £/$1.40)- that expected sterling to weaken against a strong U.S. Dollar to eventually target a rate of £/$1.37 on break below the trigger level of £/$1.57.
1. That sterling is targeting immediate support at £/$1.57 which implies it may temporarily bounce from there back through £/$1.60 before the eventual break.
2. That a break below £/$1.57 would target a trend to below £/$1.40.
On a longer term view, the chart is indicative of trading range between £/$1.57 and £/$1.37, on anticipation of the eventual break of £/$1.57. On average this implies a 10% sterling deprecation against the trend of the preceding 6 months or so.
Furthermore January;s Inflation Mega-Trend ebook included the following forecast trend and graph to manifest on a break below the £/$1.57 trigger level that occurred during February 2010.
The implications of a USD trend towards 84, therefore implies that GBP is expected to break below the £/$ 1.57 trigger level over the next few weeks to enter a new trading range if between to £/$1.57 and £/$1.40 for most of 2010, with the initial expectation of a trend to below £/$1.50 towards the £/$1.40 floor as illustrated by the below graph for 2010 :
The facts are far more serious and lie at the heart of the crisis that faces Britain and that crisis is of an out of control inflationary debt spiral that seeks to steal the value of all existing holders of fiat currencies such as the British Pound, that my new 100 page ebook The Inflation Mega-trend covers in-depth (available to download for Free NOW).
The Inflation Mega-Trend - Page 50
The inflation mega-trend continues to gather momentum, fed by literally out of control budget deficits that are being monetized by the printing of money (electronically) by ALL developed countries, for example this year the UK government will issue £225 billion of debt or £3,750 per every man women and child in the country, this IS out of control borrowing that risks national bankruptcy that will manifest itself as ever higher inflation that looks set to accelerate over the coming years.
All of the developed countries are running huge budget deficits in the order of 10-15% of annual GDP which is resulting in the loss of value of all fiat currencies against which people MUST seek to protect their wealth. The huge official debt burdens of approaching and passing 100% of GDP (Real debt is many times higher than official debt) are not going to go away, the only way government's can respond to such debt is through competitive currency devaluations i.e. INFLATION.
The government's of the world have been busy writing unlimited cheque's to bailout the bankster's who they primarily serve, the only problem is ALL of the pain will be felt by ordinary tax payers and NOT the politicians, who as we saw in the UK during 2009 have been busy burrowing their snouts in the expenses troughs so as to ensure that virtually every day to day living expense is a freebie at tax payers expense whilst tax payers are about to be hit by huge taxes.
Meanwhile Deflationists continue to look to Japan as the example of what is to transpire, however all Japan has done is to set itself up for an ever bigger inflationary BUST, Japanese public debt is now over 200% of GDP, this debt will resolve into high inflation. The Japanese government's response instead of addressing inflation will be pour more petrol onto the inflationary fires and could spark HYPERINFLATION. That is where Japan is heading and we SHOULD NOT MAKE THE SAME MISTAKE. However that is what academics and journalists that delude themselves that they are economists continuously advocate i.e. Keynesian deficit spending without end.
Furthermore, low interest rates plus rising inflation amounts to THEFT FROM SAVERS and WORKERS and all existing currency holders, including bond investors, therefore the best strategy to protect ones wealth is to diversifying OUT of fiat currencies. This strategy must remain in force as long as government's continue to run budget deficits that results in more accumulated debt resulting in higher debt to GDP ratios and hence more money printing and inflation as part of a perpetual inflationary debt spiral.
People have been conditioned by politicians and the mainstream press to think that inflation is not only normal but it is good, it is NOT GOOD nor NORMAL, Inflation is a stealth tax on your savings and earnings that over time seeks to STEAL the value of all that you have accumulated during a life time of hard work which is why most pensioners in Britain retire with savings that have little real value, whereas if there were NO inflation ALL of your savings would retain the SAME value throughout your life.
Inflation is created by government's and the banking cartel by a number of means but primarily as a consequence of the fractional reserve banking system that effectively allows the banks to continuously conjure new money out of thin air that continues to erode the value of all existing money as manifested by near continuous year on year high growth in the money supply far beyond that which is necessary as a consequence of economic growth.
Furthermore whilst people are forced to link their earnings against the official inflation indices such as the CPI and RPI, the real rate of inflation is usually significantly higher due to the fact that over time successive government's have sought to raise the stealth tax on their citizens by means of manipulating the official inflation indices lower. This has been illustrated earlier in this ebook which shows that the real UK inflation rate usually tends to be between 1.5% and 3.5% above the official CPI rate.
You are reading this at the very beginning of the inflationary mega-trend that will probably culminate in an inflationary super spike many years from now, whilst many commodities have rebounded somewhat from the crash of 2008-2009, however we have yet to see the inflation mega-trend manifest itself in the various manipulated inflation indices of the world, especially as the consensus view amongst academic economists and the mainstream press is still that of DEFLATION. However once inflation manifest itself in these manipulated indices then watch as the wage price spiral kicks in and pushes fixed assets and scarce resource prices such as commodities to unimaginable heights over the coming decade.
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British Pound Current Technical Picture
U.S. Dollar Bull Market - Update 6 - November 2009 - USD failure to rally to date and weakening trend at 75, concluded in a revised dollar target of 84. (U.S. Dollar Bull Market Scenario Update ). The Dollar continues to trend towards the target of USD84, which would equate with sterling hitting its 2010 target low of £/$1.40.
UK Interest Rates - (13 Jan 2010 - UK Interest Rate Forecast 2010 and 2011 ) UK rates are forecast to remain on hold until after the general election, thereafter rise to between 1.75% and 2% by the end of 2010. The effect of which is to depress sterling lower into the general election, after which I would expect sterling to strengthen in the face of growing interest rate hike expectations.
UK Inflation - (27 Dec 2009 - UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3% ) Despite the inflation spike to above 3% manifesting itself. However most of the academic economists and mainstream press commentators are still wrong in their expectations of this spike being temporary as I expect inflation to stay above 3% into late 2010 and thereafter only dipping towards an end year target of 2.7%. The effect of high inflation and low interest rates is to further depress sterling.
UK Debt - The Bank of England Says No More Q.E. My analysis says it will print a further £75 billion before the end of 2010 (08 Jan 2010 - Bank of England UK Quantitative Easing Money Printing to Hit £275 Billion 2010 ). Sterling's behaviour is more in line with my expectations than pronouncements from the Bank of England. The election assures that nothing will be done to address Britains exploding debt mountain until after the next general election. Even then it will take some 2 months for the next government to emerge with details of its proposed actions. However sterling is eventually expected to trend higher in anticipation of a credible plan to reduce the budget deficit by means of tax hikes, public spending cuts and revenue growth. This therefore suggests sterling weakness into the election followed by a significant post election rally.
CTFC Commitment of Traders - Heavy number of Short positions suggests Soros and his friends have a swift severe trend in mind.
General Election - Narrowing polls increase the risk of a hung parliament which would mean paralysis and weak government, that would NOT be able to deal with the debt crisis that the country faces. If we actually do get a hung parliament then we will also get parity with the Dollar ! Still hung parliaments are rare and the election has yet to be called therefore at this point in time the election is expected to generate volatility around the primary trend therefore whilst sterling could spike lower then the forecast trading range low of £/$1.40 to £/$1.37, such a breakdown 'should' be temporary.
UK Economy - Despite boosting inflation, sterling's plunge is positive for the UK economy, therefore it will probably be welcomed by the Labour government as an additional positive influence on generating an economic bounce into a May General Election, something countries such as Greece wish they could do. So don't expect any voices of support out of either No 11, or the Bank of England. The market knows this, which is why the hedgies are shorting the hell out of it. However, a weak sterling means weak bond market thus this further supports my forecast for QE to rise to £275 billion this year, and probably sooner rather than later.
Elliott Wave Theory - Not particularly reliable where sterling is concerned but is alluding towards an impulse wave lower to form a C wave of a greater ABC pattern that suggests that the low of £/$1.37 should break.
EURO - Sterling is trending sideways against the Euro in a range of between £/E 1.18 and 1.07 (1.105 current), which therefore confirms that much of the move in sterling is as a consequence of dollar strength. My overall expectation is for Sterling strength against the Euro post Election , i.e. to eventually push higher to above 1.20. However near term, if support of 1.07 gives under weight of immediate term selling pressure then sterling would once more target parity in the shorter term.
TREND ANALYSIS - Sterling's early Feb bounce from £/$1.55 to £/1.58 was pretty feeble, which set the scene for the current strong downtrend to £/$1.49. Sterling is targeting £1.37 on a longer term basis. Short-term the sell off has been very powerful and has momentum, therefore I suspect any bounce as with the early Feb bounce may again be pretty feeble. It does appear to want to home in on breaking below £/$ 1.40 sooner rather than later.
Conclusion - Sterling is short-term oversold and could bounce higher to £/$1.52-53. However any bounce would be temporary as sterling continues to target a break of £/$1.40 which looks set to occur before the end of March. Further out, the technical picture of support at £/$1.40-37 could yet be blasted in a meltdown towards sterling hitting parity with the DOLLAR, never mind the EURO! Watch this space. Protect your wealth against self destructing fiat currencies ! - The Inflation Mega-Trend FREE Ebook is awaiting your attention.
Source: http://www.marketoracle.co.uk/Article17594.html
By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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