CMC Markets – FOREX MORNING COMMENT
London – 12th May 2010

So the day has finally arrived, after nearly 6 days of haggling the UK has a new Prime Minister and a new government. The pound initially rallied on the news, but has since slipped back on fears that attempting to agree on measures to tackle the deficit may struggle to overcome ideological and party boundaries.

The markets will be waiting to see whether the £6bn worth of cuts promised in the Conservative manifesto will get implemented. Every move with respect to fiscal policy the new government makes is likely to be scrutinised carefully. The markets and ratings agencies will also be looking for evidence of any divisions between the coalition partners about how to tackle the fiscal problems facing the UK, as these divisions could indicate a lack of urgency, and continue to undermine investor confidence.

Yesterday we had a good start with manufacturing and industrial production figures coming in way better than expected.

Today should see the UK publish its latest set of unemployment figures, where it is expected to see a drop of 20,000 in the April claimant count. The Bank of England is also publishing its latest inflation report, where the market will be looking for confirmation that the Bank’s inflation outlook hasn’t changed too much from its last report, given the recent increase in the PPI figures.

On the other side of the channel the Euro continues to remain vulnerable, despite the enormous bailout on Monday, due to the EU’s refusal to address the underlying structural problems afflicting the peripheral Euro countries. There is also the small matter of where all this cash is going to come from, especially in the Euro zone.

Fears that China will look to take further measures to cool their economy have also weighed on risk appetite and boosted the US dollar.

EURUSD – as the impact of Monday’s Euro bailout continues to diminish, the single currency continues to slide back towards its lows of last week of 1.2520. Since the beginning of February the Euro has been trading steadily lower in a downward channel, where the upper boundary currently sits around the 1.3530 area. There is also resistance just below the April lows at 1.3115/20. While the Euro continues to trade in this broad downward trend the target of 1.2135 over the next few weeks continues to be the primary objective. The 1.2135 level is a key Fibonacci support level in that it represents a 50% retracement of the up move from the all time Euro lows at 0.8230 set in the October 2000 to the highs of 2008 at 1.6040.

GBPUSD – yesterday’s late sterling rally, after the failure of the Lib/Lab coalition talks and the resignation of the Prime Minister, stalled just below the key resistance above 1.5020.

The 1.5020/50 area should continue to provide solid resistance in the short term, however if we do get above this level we could see a quick rally up to 1.5120. There is support around the 1.4780 area and now that the political haggling is out of the way the pound needs to stay above this support area to re-test the 1.5000 area.

EURGBP – the Euro still remains weak against the pound even more so now that the UK appears to have a government in place. The main resistance lies around the 0.8730/40 area, while the break below 0.8500 yesterday should now open up a test of the key support around the 2009 and last week’s lows at 0.8400.

USDJPY – The dollar managed to bounce off the 92.15 support area yesterday, and this prompted a brief rally back above 93.00. With declining highs and possible increased risk aversion the yen could continue to strengthen if we break below 92.15 and re-target the 91.30 area.

We would need to see a break above the 93.50/60 area to re-target the April highs around 95.00.

Michael Hewson
Market Analyst