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Why the Pound Is Getting Pounded

Friday, 22 Feb 2013 | 7:24 PM ET
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This has been a tough week to hold the British pound. Talk of more monetary easing ahead and weak economic reports have been weighing on the currency, and a Friday credit-rating cut sent it still lower.

But if you haven't yet been selling the pound, is it too late to start?

Not at all, says Kathy Lien, managing director at BK Asset Management.

U.S. markets were the only ones open when the rating cut was announced, she says, and "when Asia comes online, when Europe comes online on sunday, what we are probably going to see is an exacerbation of this move."

On top of the reaction to rating cut, and dismal U.K. economic reports, Lien is concerned about the internal dynamics at the Bank of England. Governor Mervyn King last week took the rare step of siding with the minority and arguing for more monetary easing, and Lien thinks the BOE could ultimately follow that plan. "We are going to see a deep selloff in the pound-dollar," she told CNBC's Melissa Lee.

That said, at current levels, Lien doesn't like the risk-reward ratio on a short pound trade. She wants to wait for an uptick to 1.5400 and then sell the pound against the dollar, setting a stop at 1.5600 and a target of 1.5000.

Pound to Follow Yen Lower?
Will the pound replace the yen as the world's favorite short? The pound falls as the Bank of England keeps printing money, with CNBC's Melissa Lee and the Money In Motion traders.

What might cause the pound to reverse course temporarily? Amelia Bourdeau, director of foreign exchange at Westpac Institutional Bank, has an idea.

She agrees with Lien that the pound is likely to fall further when Asian and European markets reopen, since traders there have not yet had a chance to react to the downgrade. But U.S. market traders have already responded to the news, so when U.S. trading opens on Monday, "that's when you're going to get a kick up and that would be your time to enter a short."

Brian Kelly of Shelter Harbor Capital has another way to play the bad news from Britain. He points out that the Swiss National Bank has been buying British assets as it diversifies its reserves. "If you get sustained weakness in the pound," he says, "people might start selling Swissie."

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm.

Learn more: The essential vocabulary for currency trading is on Key Terms Dictionary. Top currency strategies are broken down for you in Currency Class.

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