Sterling Spread Betting Markets Gain as Euro Wanes
The Pound and the Dollar have been competing over the past 18 months for the crown of least wanted currency in their own battle of the uglies.
It now appears that the Euro is winning that war as the Pound starts to recover on the back of a new coalition government and improving economic data.
This weeks PMI data has certainly improved sentiment with each figure slightly ahead of analyst’s expectations. Next week’s central bank announcements aren’t expected to herald any big shift in monetary policy from the Bank of England but we could well see additional measures from the European Central Bank with respect to its bond purchasing program.
The credit crisis that caused the slump in the Pound and the rescuing of the major UK banks in 2008 has clearly taken its toll on the UK economy. In addition, serious headwinds still face the government as they strive to get to grips with the yawning budget deficit.
However, the fact that the UK banks are well down the road in dealing with their bad debts gives them a head start on European banks.
The determination of the UK coalition government will no doubt be tested in the weeks and months ahead as the market looks towards the emergency budget on the 22nd June.
Some of the noises coming from public sector unions remain ominous as the government seeks to reassure bond investors that they are serious about managing the liabilities accumulated under the previous administration.
There is a reasonable chance that the UK could well hang on to its prized Triple A rating in contrast to Spain, which lost its rating with Fitch earlier this week. However, any splits in the face of public sector union opposition to cuts could well test the unity of the new coalition government and unsettle the markets.
This new optimism has been reflected in the performance of the pound over the past few days as it hit its highest levels since January against a basket of currencies above 80.00. The 10 year gilt price has also risen to its highest levels in over a year.
One of the currencies that the Pound has gained against significantly has been the sickly Euro which has lost over 5% of its value in the last month alone.
A break of the key 18 month low at £0.8400 has now opened up the possibility of further Euro declines towards £0.8165/70 level. This would be a 50% retracement of the up move from the 2007 lows at £0.6535 to the 2008 peaks at £0.9801.
This move may well begin to unfold over the next few weeks and months as we head into the latter part of the year.
A move back above £0.8550 would be needed to minimise the downside risk in the short term, while a break below £0.8170 would then target £0.7785, the 61.8% retracement of the 2 year up move.
While the UK banks appear to be well down the road to dealing with their debt problems, European banks remain extremely nervous with respect to their own. European Central Bank data suggests that these European banks have parked just over €320bn in the overnight deposit facility in preference to lending to other banks at higher rates.
This alone suggests that this credit crisis will continue to weigh on sentiment towards the Euro and the Eurozone banks while they remain reluctant to lend to each other. The European Central Bank earlier this week warned of further bank write downs and the likelihood will be that the ECB will have to maintain a loose and stimulatory monetary policy for a long while yet. This is only going to continue to weigh on the single currency.
Strikes across Europe will continue to test governments resolve to deal with the issues at hand with the splits in the Spanish government starting to appear already. The changes that are being forced on the Spanish labour market are starting to bite and sap political will to deal with the problems.
Prime Minister Zapatero is already struggling politically. Even though the austerity budget was passed by a single vote, some opponents are already pressing for him to step down and for a new election to be called later this year. How that would be viewed by the markets is not difficult to guess.
The recent Euro rally away from its key support at $1.2135 continues to keep traders on their toes as global central banks continue to issue broadly supportive statements with respect to their Euro denominated holdings.
Iran’s actions notwithstanding, further Euro declines could well test this broad consensus, especially if the Euro were to break below the $1.2135 support area.
A break below the $1.2135 support area has the potential to open up a move towards $1.1210 which is the next Fibonacci support level in the longer term.
In the short term though, the immediate target would be a move towards $1.1650/1.1700 area, which is the 2005 lows.
It would take a Euro move back through $1.2450 towards $1.2760 to stabilise the current oversold nature of the market, however even if that were to happen the down side pressure could well continue to predominate.
The Euro is already trading just above its lowest lows since March 2006 against a basket of currencies and current sentiment looks as if it could trade even lower.
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Note - Spread Betting carries a high level of risk to your capital and you can lose more than your initial investment, it may not be suitable for all investors. Ensure you only speculate with money that you can afford to lose and that you fully understand the risks involved and seek independent financial advice where necessary.
'Sterling Spread Betting Markets Gain as Euro Wanes', Feature by D. Jones, last update: 4-Jun-10
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