YB Currency Update – Monday 8th June

YB Currency Update – Monday 8th June

Two years ago I came back from holiday in late July to find that the credit crunch had hit and the markets had fundamentally changed. As I return to the office this year it is the political structures that are crumbling, UK expenses hurt all the parties equally, but as Labour are the party of government they have much more to lose. Local council elections, and even more European elections, are often used by voters to register there disapproval of the government, without actually voting for the opposition into government, and this time has seen Labour lose majestically, as a party crumbling in the polls, and as a government seeing many of it's high profile women, and some of it's men, attempt to topple the Prime minister. The Labour parties fortunes are now tied to Gordon Brown's, at least until the next election, as any change in leader would mean a snap election, so the rumours of Gordon quitting that magnified the Sterling wobble last week, was never likely to be true, however it has still had it's effect and Sterling has tumbled.

The Pound has been rallying strongly, pushing up to above 1.66 against the Dollar, and above 1.16 against the Euro, but a combination of market sentiment and political instability have hit sentiment on the Pound. Of course it is likely that due to the Pound's amazing rally, investors have just taken the political instability as a convenient time to take profit on their speculative trades, which would indicate that the collapse is only a temporary setback, and not the precursor of a shift in the long term trends, and even with a 2c drop in just a few days Sterling still sits much higher than it has done for almost all this year against the Euro, and the long term trend is still upwards.

Sterling's drop against the Dollar has been more pronounced, almost 8c, taking it down to near 1.58, and this has been influenced by a shift in sentiment on the Dollar. Last Friday saw the non-farm payrolls released and the numbers of a drop much less than forecast, have had the unexpected effect of actually strengthening the Dollar, rather than leading to investors leaving the Dollar's safe haven as good news has done previously. The Dollar's rise on the back of good US news points to a shift in the pattern of Dollar trading where the fundamentals of America's economic position is having more effect on the Dollar than the safe haven flows, this points to an end of the Dollar's bearishness, which points to a fall in the EUR/USD rate but the Pound is likely to continue it's rally against the Dollar, although it may find it harder going than it has in the past few weeks.
There is little data today, so the markets will likely concentrate on the outcomes of the European elections, although the focus will be more on what it means for the UK government, as the actual elections are for the European parliament which has little effective power. Sterling is likely to be on the defensive, although it looks supported around 1.58 against the Dollar, and 1.14 against the Euro.

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