GBP/USD – 2 year high for the dollar in sight of Britain's frail economy

Tuesday, August 26, 2008

Data on the UK's gross domestic product has revealed no changes in the second quarter at 0.2% quarterly growth, its lowest in 16 years. This rose investors' expectations that the Bank of England would cut interest rates. This as well as weak data from the European region gave support to the dollar.

Despite the weakening of global economies and the resulting boost of the dollar, traders remained skeptic about the continued rise of the dollar due to the frail U.S. financial system. Traders will be closely monitoring U.S. housing data to be released this week, as well as new developments about the future of Lehman Brothers investment bank and mortgage giants Fannie Mae and Freddie Mac.

I believe that market focus for the near future will be on the sterling and oil prices – two key elements in keeping the dollar stable. Oil prices fell the steepest fall in 4 years on Friday to below $115, thus increasing the dollar's gains. Moreover, Investors will act carefully at this week's housing data, which might limit the dollar's gains, yet they have no reason to sell the dollar for now.

The sterling fell to $1.8415, its lowest rate since 2006. This slide brought about unexpected short positions in the sterling, perhaps making it possible for the currency to recover.

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