British Pound: 5 Reasons Why the Pound is Being Pounded

1. Britain’s Prudential announced plans to buy AIG’s Asia operations for $35.5 billion in cash and stock - since this is partially a cash deal, it will involve selling British pounds.

2. Gilts Losing Luster - According to the FT, the gap between the U.K. and German interest rate has risen to the highest level since 2005. Even though the official U.K. interest rate is less than the Eurozone’s interest rate, the cost of servicing government borrowing in the U.K. over Germany has increased significantly.

3. BoE Could Raise QE - Based upon the dovish comments from Bank of England officials at the beginning of last week, there is a tiny risk of the BoE raising the size of their QE program on Thursday. Even if they do not, the tone of their statement will be dovish which is also bearish for the GBP.

4. Short GBP/USD Positions Hit Record Highs - According to the CFTC Commitment of Traders report published on Friday, short GBP and EUR positions have hit the highest level ever. Forex traders are clearly very bearish pounds and they have good reasons to be with jobless claims at 12 year highs and consumer spending falling by the most since Feb 2009.

5. Stop Orders Tripped, Hedge Fund Selling - There has also been a lot of chatter about hedgies selling the GBP. There were a ton of stop orders sitting at the previous 9 month low of 1.5117. When the GBP/USD broke that level, the currency pair dropped very quickly. The selling exacerbated when stop orders at the 1.50 level were tripped, but the big move came when the GBP/USD broke below 1.4935 - it fell 158 pips in 3 minutes.

With so many straws on the camel’s back, it was bound to fall under the pressure. A bounce is not out of the question after such a big move particularly since the GBP/USD has not able to rally for the past 9 trading days. However unless the BoE stops talking about QE and we don’t expect them too, the GBP will continue to be the worst performing currency.

Finally, the GBP/AUD has hit a record low. Last week, I blogged about how shorting GBP/AUD is my favorite trade. At the time it was trading above 1.73 and today it hit a low of 1.6545. Hopefully you managed to bank some solid profits. I still expect it to move lower - but this is where trailing stops should be implemented to lock in profits.

U.S. Economy is Showing Improvement -- U.S. Dollar Strong in Forex Trading

The U.S. economy is showing improvement, and that is providing a backdrop for a strong dollar in forex trading. Indeed, reports from the Fed's Beige Book show that 75% of the Fed districts are showing improvement. But enthusiasm is being held in check.

GFT's Kathy Lien describes what is helping -- and hindering -- economic recovery in FX360:

Consumer spending and manufacturing is leading the recovery but the labor market and commercial real estate remain problems areas. Some growth potential may have been held back by the intense snowstorms that shut down many businesses during the month of February which is good because it means that activity could snap back in the coming month. Inflation pressures remain modest at best which poses some threat to the chances of a rate hike in the third quarter.

Normally, improvements to the U.S. economy would signal a rise in equities and high beta currencies, but that it is not happening right now. For now, the sterling and euro struggle in forex trading.

The euro zone is being hit by the Greek crisis, and the pound is affected by Britain's economic issues -- including the fact that there are worries about U.K. public debt. As a result, the U.S. dollar, which is backed by an economy that is improving at a better rate, maintains the upper hand.