Currency Update – Thursday 6th May 2010

Currency Update – Thursday 6th May 2010

It's been a long haul, or at least it's certainly felt like one, but at last we have reached the finish line and the election ends today, of course if the outcome of the election is a hung parliament, which seems increasingly likely, then although the voting may be over the politicking will continue. A hung parliament will result in potentially weeks of haggling over who forms the government, although there is an informal deadline of the Queens speech on the 25th of May, to focus the politicians minds. If the haggling does drag on then the resulting uncertainty is likely to weigh on the Pound over the coming weeks, and some of it may already be weighing on the Pound especially against the Dollar, against which the Pound has slipped to below 1.5050 overnight, although the risk aversion from the Greek debacle is also giving the Dollar a boost.

While we in the UK have the opportunity to exert some, albeit limited, political influence today via an election, the Greek public had their election last year, and some have instead chosen to exhibit their anger at the current Greek government by taking to the streets. The scenes of violent riots in Athens yesterday, including an attempted invasion of the parliament building and a successful invasion of the Parthenon, have no doubt helped drag the Euro lower, but the fears of the Greek crisis causing contagion in other Eurozone states is also a major driver. Standard and Poor have put Portugal onto negative watch, with a potential two notch downgrade in the wings, and comments from Weber that 'there is a threat of grave contagion effects for the other member states of the monetary union', have not helped. Weber was actually trying to prompt the German parliament to ratify the rescue package quickly, and therefore may have been overstating the case for rhetoric effect, but the problems for the Euro have gotten so bad that it's role as a reserve currency have been called into question.

The seemingly endless troubles for the Euro have taken it down to a 14 month low against the Dollar below 1.2750, while the Pound has also managed to hit a 10 month high against the Euro pushing above 1.18 overnight, although it had fallen back to just below this level in trading this morning. The Euro crisis hasn't just effected European markets, the Australian Dollar has also suffered from the retreat from perceived risk, falling 3c from the end of April to 0.9 against the USD, while the Pound has stayed relatively steady around 1.66 against the AUD.
With the election and the Greek crisis dominating the headlines some of the usual economic events are being overshadowed. Today there is an ECB meeting, which once again will not make any material changes, but their comments on the continuing Greek crisis could be interesting. However the election will be dominating today's UK news, and the fallout tomorrow is likely to overshadow the usual headline making US non-farm payrolls, at least in the UK. We are in for an interesting few days, not just for the markets but also for the future strength of the EU, and the next five years for the UK.

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