Originally posted on the ForexFactory on Oct 15, 2009.
Up until Oct 14 the pound was one of the worst performers and was not benefiting from the dollar weakness. This was primarily because of the weak economic data out of the U.K causing some ppl to compare their economic recovery to be as sluggish and slow as the U.S. recovery. U.K inflation data came out lower than expected which means the Bank of England is no hurry to raise interest rates anytime soon.
Bottom line is that the market’s perceptions during the Oct 8- 13th Gbp/usd drop was that the U.K economy was in the same boat as the U.S. economy. This also caused the dramatic rise in Eur/gbp.
Eventually some profit taking kicked in on gbp/usd, combined with general dollar weakness this caused the GBP to catch up to all the dollar selling that was happening. Stops were tripped at various levels all the way up further exacerbating the move. Eur/gbp also decided to correct in a hurry further adding buying pressure to the pound.
So in summary:
1. Significant dollar weakness led to some GBP buying pressure
2. Profit taking on gbp/usd shorts led to buying pressure
3. Stops were tripped on the way up in gbp/usd
4. Eur/gbp dropped like a rock causing people to bid up the pound a lot more than they usually would have in the weak dollar environment.
Hope it helps.