Both the Pound and the Euro have turned decidedly lower as financial markets focus on the crisis in Europe, all the while ignoring the one raging back home. In the case of both the Pound and the Euro their 50 day moving averages (green lines) have now crossed below their 200 day moving averages (red lines), pointing to developing technical bear market in these two currencies.
5 year chart of GBP/USD
5 year chart of EUR/USD
Hedge fund driven currency speculative frenzy has no doubt exacerbated the downward trend in both the pound and the euro, resulting in the illusion of the dollar as the "safer" currency. As the dollar rallies upwards it is causing the carry trade to unwind, helping propel it even higher such that it has now entered bull market territory. A graph of the US Dollar index shows that the 50 day moving average (blue line) has now climbed above the 200 day average (red line), signalling a technical bull market in the dollar.
We expect dollar strength coupled with a weakness in the euro and the pound, to continue since trends in currency markets once established usually persist for some time.
Note that on the back of the weakness in both the euro and the pound, gold hit new highs when measured in those two currencies (see charts below). As long as the dollar holds its upwards trajectory gold will most likely fail to break new highs in dollar terms i.e. cross $1200. Just like the stock market we expect gold too to remain range bound till the middle of this year ($1000-$1200), with a test of $1000 being a lower probability event. The Indian purchase price of ~$1050 has set a pretty strong floor for gold so it will take a lot of pressure for it to break that zone. Also any overt purchase of IMF gold by China is unlikely, since that will immediately drive down the value of their dollar reserves. China being one of the largest producers of gold is most likely filling up its coffers from its own mines, and supplementing this stash with covert purchases.
Note that the long-term path of the dollar is most certainly downhill but in the short term we will see rallies such as these as the markets tend to digest problems sequentially - one at a time. Remember the earlier sequence: Bear Stearns, then Lehman, then AIG, then Merrill, then Morgan Stanley and Goldman. For the currency/sovereign debt markets the sequence has been similar (smallest to largest): Iceland followed by Dubai, then Greece, now Britain and soon Spain, Portugal and Italy, then the Euro zone as a whole, with the last stop being the United States.
Gold in Pounds
Gold in Euros
Gold in USD
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