Sterling Sell-Off but No Crisis

Sterling sold off hard on Monday and had a range (according to Bloomberg data) of $1.4784-$1.5209. While such a steep sell-off is rare, they do happen more often than many headline writers and market participants seem to recall. Last year it happened several times and a review of them maybe useful.

The first time was so wicked that it took place over two days. On January 19, 2009, sterling's range was $1.4909-$1.4418 and on January 20th, the range was $1.4443 to $1.3863. Sterling fell 10.5 cents in two days. There was not a crisis. There was some follow through for three days. Sterling fell to a low of almost $1.3500 before putting in a low that has not been seen since--though we would anticipte seeing it again in this bear cycle for sterling. That violent two day sell-off is probably best understood as a capitulation trade.

The next time was on September 24th. Sterling fell from $1.6387 to $1.6028. There were two days of follow through, during which sterling fell just bleow $1.58. After a couple of weeks of broad sideways trading, sterling slipped to almost $1.5700 on October 13th.

Over the next month it advanced by 11 cents, but there was another storm that had to be weathered. On October 23rd, sterling fell from almost $1.6700 to $1.6300. There was one day of follow through and then the advance resumed.

In the same sample set from last year, each time sterling fell by around as much as it fell (from high to low) on Monday, there was follow through and it often was a couple of cents.

It is too soon to pick a bottom in sterling, but better to sell sterling into upticks rather than in the hole. We identified the $1.50 as the minimum recovery target off the $1.4784 low, but would prefer to sell closer to $1.51.