24th April - Cable and the election
27 April 2015
TECHNICALS:
Monthly Euro chart
The long-term picture of the market is one of great bearishness.
The completion of the bear continuation Triangle is set to drive the market down at least to 1.53 and probably below it.
The market has to rally through 1.55 before that Triangle is smashed and the bear scenario destroyed.
Daily Euro Dollar chart
But this is interesting.
The market has refused to stay beneath the recent 1.4948 low.
Which is also the recent low (precisely 1.4829) from 2013.
Note that the rally over the last few days has brought the market up to the diagonal from July 2014.
If that mild resistance were to break there might be a further push higher still to 1.5751.
FUNDAMENTALS:
With only just under 2 weeks to go until the UK General Election, the Pound has begun to rally, when given the dead lock indicated by the opinion polls, showing neither of the two major political parties likely to be in a position to command a majority in the house of commons, the question begs asking why?
If the situation doesn’t change there are several permutations that could unfold after the election as the parties attempt to find partners in order to form a coalition government.
One scenario is the Conservative party remains the largest party and forms a coalition with the Liberal/Democrats. This is the composition of the out going government and it has worked well; delivering a solid recovery with a clear debt reduction program.
A second scenario could involve the Conservatives and UKIP. This is a less favourable option since UKIP will demand a referendum is called ASAP on the UK’s continued membership of the EU. This could prove a demand too far for David Cameron the Conservative party leader.
A third scenario is the Labour Party emerges as the largest party and does a deal with the Liberal democrats. This could offer a degree of common sense to what are generally perceived as Labour policies that are anti business, would grow the deficit and risk the recovery.
A forth scenario is where the Labour party, either as the largest or indeed the second largest, does a deal with the SNP. This is a dangerous and least favoured out come..
The SNP; Scottish Nationalist Party exists to win independence for Scotland from the UK. Scotland held a referendum on the question last year and the people of Scotland voted to remain part of the UK.
The SNP has thought of a new plan, get as many of its MP’s into the Westminster Parliament, hopefully as the King maker in a “hung Parliament”, demand such onerous conditions for its support in the commons that the English majority will be only too pleased to see Scotland go its own way.
This might sound fanciful, but it is a very real possibility and isn’t fully priced into Sterling.
True currently the UK economy is enjoying solid growth, with low inflation, low interest rates and recovering public finances, but the truth is all of this could be ruined come May 8th.
Traders/investors are either oblivious to this or they judge there will be a late swing in the Conservatives favour, as voters finally realise the economic recovery that has proved a strong growth creation machine will be wrecked if a Labour/SNP coalition comes to power.
That leads us to conclude that the current rally in Sterling is a dangerous correction and traders should not get sucked into going long.
Next story:
1st May 2015 - UK Bonds and the Election 
Previous story:
16th April - Watch the Euro