26, February 2013

GBP/USD (a 4-hour chart)

GBP/USD (a 4-hour chart)

Moody 's dropped a bomb on the British pound a half an hour before the close of U.S. markets on Friday. For the first time ever, the rating agency stripped Britain of its precious AAA rating. Almost immediately, the British pound fell by about 75 points, or 0.6%, and probably would have fallen even more if the ad did not appear just before the close of the market, as European and Asian traders were already asleep or getting ready for the night.

In early Asian trading on Sunday, GBP continued to fall below 1.51 to the lowest level since July 2010.

When the news broke out, many economists have argued that the decision of Moody was expected and would not have a significant impact on the currency, but the market reaction that we've seen so far, they say that traders do not act as "experts" predict. In the long term, these economists are right in saying that the downgrade will not keep investors from stocks and bonds the UK, but in the short term, we can see the GBP/USD at 1.50, and possibly even will test 1.45.

In principle, GBP/USD could fall by at least 2-3%. Technically, GBP/USD broke its 2.5 year old range down.

Psychologically important level of 1.50 can serve as support in the short term, but in March 2010 and May 2009 lows 1.4755/85 seems to be more important.

However, traders should also have in mind the fact that the GBP/USD is very volatile currency pair, which may experience significant fluctuations in day. Hourly charts show the break on Sunday from 1.5160, and if the gap is filled, we can see a strong rally to 1.52, and the short term, but it is likely upward correction will be limited at this level.