The GBP USD dropped sharply lower on Friday and finished the week by posting a new low for the year.  A report showing a contraction in the economy during the second quarter is an indication that the U.K. is either in or headed toward a recession.  This also indicating that the Bank of England has to consider a rate cut to stimulate the economy.  The weekly chart indicates the possibility of a break to 1.8367.

News that a Korean Bank is “considering” an investment in Lehman Brothers helped rally the Dollar on Friday.  The strong up move erased about half of the Dollar’s loss against a few of the majors, except for the British Pound which made a new low for the year on Friday.
 
The move to buy Lehman Brothers and the rally in the Dollar clearly identified the main cause of the Dollar’s recent weakness.  Since July 15 the market seems to have absorbed the problems at Fannie Mae and Freddie Mac as a government bailout has been accepted as the final solution.  Traders, however, did not know how to handle the Lehman situation.  Since the Fed has already indicated that Lehman was not a Bear Stearns, and not a takeover candidate, the break in the Dollar this weak was an indication that the market was gearing up for the worst - a failure at Lehman.

The news regarding a possible buyout of Lehman gave the Dollar a little breathing room, but the failure to close all of the Forex markets lower for the week, left open the possibility of another sell-off next week.  The key to next week’s direction is to watch Lehman Brothers, not Fannie Mae or Freddie Mac. In other news, Bernanke hurt the Dollar’s rise a little when he stated that he expected slower inflation and a more stable currency.  This statement led trader’s to believe that the Fed was in no hurry to raise interest rates.

PATTERN

Main Trend:  Down
Main Trend Top:  2.0157  (07-15-08)
Main Trend Bottom:  1.8511 (08-18-08)

PRICE

1.9528        .618 Retracement
1.9334        50% Retracement
1.8793        Gann Angle Down
1.8618        .618 Retracement

1.8521           New York Close

1.8367        Monthly Gann Angle Up

TIME

Aug 20         180-Day Cycle
Aug 23          90-Day Cycle
Aug 27         180-Day Cycle