Currency Update – Tuesday 20th April

Currency Update – Tuesday 20th April

If this election is about change (as every party is telling us, even the party that's been in power for 13 years), then the change must come to the electoral system. The peculiarities of the first past the post system, now seem so embedded that election analysts on news programs can show charts with Labour getting the least votes of the three main parties and yet still end up with the largest number of seats, without any comment. Of course if the Lib Dems can carry their surge of support into the ballot box, they should be able to exert enough pressure to bring about electoral reform, which will change the face of UK politics forever. A hung parliament is looking ever more likely with all three parties' support within a tight 5% band around 30%, and this has weighed on the Pound, but perhaps not as much as some expected. Each parties manifesto showed that for all the Conservatives previous strong rhetoric, each parties intentions for the deficit were roughly the same, which should mean that a minority or a coalition government may be able to get something done.

The Pound's weekend slip against the Euro has been modest, and it has recovered most of what it did lose to still sit just under 1.14 this morning. The modest slip is most likely due to the single currencies own ongoing problems with Greece once again dominating the Euro landscape. The details of the €30bn rescue package have not yet been ironed out and already some ECB members have publicly commented that more maybe needed, perhaps as much as €80bn. The ECB member, and Bundesbank President, Weber also commented that the Greek public don't appreciate the seriousness of the nation's problems, but it may be that the EU as a whole don't appreciate how hard it's going to be to turn around the wasteful and corrupt Greek state. The Icelandic volcano isn't just dominating UK news, with the whole of Northern Europe also affected, and it isn't only tourists who are stranded but many goods also; the concerns are that the lack of transport will create a drag on the economy, although it's only been 5 days and some airports are expected to open today, the volcano is still blowing ash so it may not be over yet.

The Pound has also recovered some of it's lost ground against the Dollar, pushing back up to around 1.5350 this morning. The Dollar's mild retreat has come about as it has come to light that the SEC only narrowly voted 3-2 to take action against Goldman Sachs, this has raised the prospect that the case may not be watertight, and that further action against other banks may not be taken. Citigroup have also announced a doubling of it's first quarter profit, which has pushed financial stocks higher and reversed some of the fall in risk appetite seen yesterday.

We have the latest inflation figures for the UK today, and after last months surprise drop to 3%, this month is expected to tick slightly higher as the surge in petrol prices over the month pushes the measure up. Even at the expected figure of around 3.2%, CPI is slightly lower than the BoE forecast in their last inflation report so it is unlikely to have much effect on the perceived chances of a rate increase. A reading above 3% will trigger a letter to the Chancellor from the Governor, but the BoE can point to the volatility brought about by tinkering with VAT, as well as the forecast for a dip of inflation in the medium term, to cover their backs.

There is also a Greek auction of €1.5bn worth of bonds, which although all will be sold, the yield at what they are sold at should give the market some indication of how bad the crisis has got, at least until the larger auction in the middle of next month.

The Pound has been pushing higher over this morning's trading and as the inflation figures are unlikely to cause it any problems, it may be well supported throughout today

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