Currency Update – Tuesday 27th April

As the Conservative and Labour parties have largely failed to discredit the policies of the Lib Dems, they have instead spent much of yesterday warning about the dire consequences that a vote for the yellow party, and the resulting hung parliament, would entail. Cameron actually said that Nick Clegg wanted to ‘hold the country to ransom’, by insisting that the price for a coalition would be electoral reform in which the roughly 30% of the electorate who vote for the Lib Dems would have their votes fairly represented. It seems that just as the parties want to stoke up the fears of a hung parliament, the markets themselves are becoming more sanguine about the issue. The speculative positions in the market, which were heavily betting on the Pound weakening over the election period, have slowly been drawn back in over the last four weeks, even as the prospects of a hung parliament look ever more likely. If the polls stay balanced up to the election next week, then it may test the relaxed stance of some investors, and if the Conservatives extend their narrow lead, it would probably be a Sterling positive move, however that seems unlikely unless Cameron performs exceptionally well in the Thursday’s debate.

Although the election doesn’t seem to be weighing on the Pound, that doesn’t mean that it will continue to rise, it has already fallen back since hitting 3 month highs against the Euro yesterday. The Euro initially fell yesterday as German resistance to the Greek bail out continued. Britain is not the only European nation with elections, Germany has some local elections coming up, and as the German public are firmly against the Greek bailout, Merkel has to play a hard line; she has said that Germany will only cooperate with a bailout plan if Greece implements a sustainable process to cut their deficit over a period of several years. Greece is trying to cut it’s deficit, but is facing domestic opposition even for it current plans. There were some fears over contagion, across to Spain and Portugal, from the Greek crisis, however these were eased slightly by some supporting statements from Bundesbank President Weber, who said that the credibility of the Euro was not an issue, there was no risk that the Euro would collapse, and that Spain and Portugal are ‘in a totally different fiscal space’ than Greece. The Pound has failed to hold onto yesterday’s highs and has slipped back against the Euro to hover just above 1.15.

The Greek crisis has continued to weigh on global sentiment, and this has given the Dollar a boost, along with the expectations that the Fed may change their wording on tomorrow’s statement to indicate an interest rate rise this year. It is hard to see where these interest rate expectations are coming from, the Fed have been at pains to reassure the markets that interest rates will stay at low levels for some time, and the Fed will not want to spook the markets or harm the US’ fragile recovery. The Pound has fallen back against the Dollar to sit around 1.54 in this morning’s trading.

There is a little UK data out today, in the form of Mortgage approvals and the CBI distributive trade survey. Mortgage approvals are likely to be up, mostly due to the warmer weather, while the CBI data is expected to show a small tick upwards. Goldman Sachs are to go in front of the Senate committee today to answer for their allegations of fraud, and their performance may influence financial stocks this afternoon. There is also consumer confidence figures out for the US, which are expected to rise, although some of the regional survey’s point to downside risks for this release, which could weigh on risk appetite. For now the Pound seems well supported above 1.15, and around 1.54 against the Euro and the Dollar respectively.