by Jon Beddell
Foreign Currency Market Update – GBP / USD Update
A bout of investor risk aversion is helping the Dollar this week. Slowing Chinese growth, a major oil spill and continued fears over the Greek debt situation conspired to drive stock markets sharply lower. The dip in global stock markets in turn boosted the US dollar gain against most other currencies as investors bought the currency as a “safe haven”. The greenback was helped further by extreme weakness in the Euro following confirmation of Greece’s €110bn rescue package over the weekend. The euro failed to take comfort from the news, and retreated sharply as traders examine the cracks in other euro zone economies, particularly Spain and Portugal. Spanish prime minister Luis Rodrigues Zapatero was yesterday forced to deny that Spain would be the next country to seek a rescue package from its EU counterparts. These tensions sent the Euro over 1% lower against the dollar.
Meanwhile, the election dominated the newswires in the UK, almost eclipsing a sharp rise in manufacturing activity. The Purchasing Managers Index rallied to a reading of 58 in April, up from 57.3 last month. A reading above 50 indicated expansion. The increase in activity is partly attributed to the Pound’s relative weakness, a trend that makes British goods cheaper for foreign buyers. On the negative side, mortgage lending fell sharply in April, underlining the fragile outlook for the housing market.
Back on the election trail, the market is already pricing in a high probability of a hung parliament resulting in a coalition government. Given the unprecedented uncertainty surrounding this general election, any outcome is likely to be greeted with short term relief. Simply getting the vote out of the way should give Sterling some much needed stability while investors digest the result and decide whether the next government will tackle the budget deficit. The big question is whether the stock markets will also stablise, allowing the pound to recover this week’s losses against the dollar. Continued weakness in stocks would help the Dollar, offsetting any post election bounce in the pound.
The technical outlook is in serious danger of turning negative. Major technical support at 1.5125 was tested yesterday and we actually spent time trading below that key level. If the market closes below there today it would set the scene for a return toward the March lows around 1.4800. Buyers of the Dollar should consider covering half of any requirement now, and the balance if we make a daily close below 1.5125 (based on the interbank rate).
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