by Jon Beddell
Foreign Currency Market Update – GBP / USD Update
Markets were calmed yesterday as a rescue package for the ailing Euro coincided with some optimism that a resolution to the UK election was close at hand. The FTSE surged 5%, and high yielding currencies rallied. The Dollar slipped, allowing the Pound to make early gains, but by the end of the day most of those gains had been erased as a fresh wave of uncertainty gripped the markets. Pundits are even now calling the Euro debt program a short term fix only. The EU action was prompted after yields on Spanish and Portuguese debt rose toward crisis levels last week, and the Euro plunged 5% against other major currencies, raising the spectre of a major currency crisis. The €750bn package being fronted by the EU and ECB is designed to stave off short term debt problems for the weakest euro zone countries while structural reforms are implemented to tackle the underlying reasons for their debt problems. Spain’s unemployment rate is 20% and the country is still in recession. Portugal’s economic health is equally frail. The alternative to this extraordinary action was to allow markets to drive the Euro lower and potentially force the destruction of the union. The importance of this development has perhaps been overshadowed (at least in the UK) by the general election, which is still the only headline story.
Sterling slumped by over a cent immediately after Gordon Brown’s resignation statement which left the door open to a Labour / Lib’ Dem’ deal and cast doubt on whether a Tory / Lib’ Dem coalition would be formed. This continued uncertainty will be the main driver of Sterling this week. A key £2bn bond auction to be held this morning will give an indication of the market’s current appetite for UK debt.
The technical outlook is mixed. Sterling broke below the key 1.4774 support (March low) on Friday but managed to claw back the losses before the market closed. Yesterday we had a look at the 1.50 level but didn’t like it, selling off to end the day almost unchanged. This is volatile price action, and we would recommend clients on both sides of the fence hedge at least half of any exposure now. The trend is still down, so we continue to favour the Dollar until Sterling can prove itself by capturing 1.5150.
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