While the euro has been beating up on the US dollar recently, the British pound has not seen fit to join in.  Rather than rallying, the pound sterling has been hit by a variety of crises, including the weak global equities market and the US housing problems.  The resurgence of Foot and Mouth disease in the English countryside points to a further deterioration in the pound’s standing.

The weak stock market has proved especially damaging to the financial services-driven British economy.  And as credit continues to get more expensive, demand will dry up for whatever the City has to offer.  New reports have also surfaced from British banks that the subprime problems in the US are starting to have a negative effect across the pond as well.

Recent economic reports from Great Britain paint a mixed picture.  Retail Sales growth printed at 1.2%, the lowest level since November.  Currency traders drove the pound to a two-month low against the euro and to its second straight day of losses against the US dollar.  The concern in the FX market centered around worries that five consecutive interest rate hikes may be putting a brake on the British economy.  But GDP growth came in at 0.8% versus 0.7% expected, suggesting that monetary policy is still accommodative to further expansion.  But the market moving data out of London is the reemergence of Foot and Mouth disease, and it is this news that should strike fear into all currency traders long on the British pound.

If the disease is not contained, FMD is almost guaranteed to sink the British pound .  The first reported outbreak was on August 3, and a second case was found last night.  The area has already been quarantined, and a voluntary export ban has been established for England, Wales and Scotland.  The last FMD outbreak cost the British economy 10 billion pounds.  Meat prices rose 5% and inflation was estimated to be 0.1% higher. For the forex market, an analysis of the past is even worse.  In the summer of 2001, after the first reports of contamination in the livestock, GBPUSD fell from 1.4750 to 1.3680, a drop of over 1000 pips.  GBPCHF has already begun it breakdown .  All those with an exposure to the British currency should be wary of the current market and keep an eye out for future developments with FMD because the disease, and what happens with it, will be the major driver of action on the pound for the time being.

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