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8th May - Sterling Euro pressures post Election

11 May 2015

TECHNICALS:

Monthly Sterling Euro chart

The Euro has been weakening for the last two years.

But note the massive  parallel flag formation that may have formed over the last SEVEN YEARS.

We are at the lower diagonal of that flag, a natural level of support for the Euro...

And

We are at that support from the Prior High at 0.7255 from 2003.

The coincidence of levels of support suggest powerful forces set to drive the Euro better and Sterling WEAKER.

Daily Sterling Euro chart

In the day chart note the reluctance of the market to break up through 0.7402.

Fruther, a break of the rising diagonal at about 0.7150 would complete a bear Flag formation.

Sending the market a good deal lower.

But given the big picture the bears would do well to wait for a break of the 0.7010 low before selling.

FUNDAMENTALS:

After months of speculation and six week’s of opinion polls showing both the major political parties running neck and neck, the outcome was very different to what almost everyone expected: a Conservative majority government albeit with a slender majority.

So what does this mean for the markets and more specifically Sterling?

Some might argue that the electoral indecision consistently indicated by the opinion polls during the campaign had had limited impact on the Pound. Against the Dollar it had actually put in a decent rally and although corrected against the Euro, the move was not very significant.

But look closer. The Pound’s rally against the Dollar had much to do with Dollar weakness driven by a weaker than expected performance by the US economy in the 1st quarter of the year. This combined with some mildly positive data emerging from the Euro zone and saw the Euro stage a strong recovery against the Dollar and to a lesser extent against the Pound.

So one could argue the closeness of the election campaign was the Dog that didn’t bark. We don’t see it that way. The UK economy has continued to outperform both the US and Euro zone despite a weaker than expected UK Q1 GDP report. Additionally UK public finances are on the mend and inflation is at zero. At any other time this would have fed into a stronger performance by the Pound against both the Dollar and the Euro. So that would have put Cable closer to 1.6000 and against the Euro on the way to 0.6800.

But now the election is out of the way and the markets have the certainty they crave, and a pro-business free market Conservative government in place, does that mean the Pound is set to roar away against the Dollar and the Euro?

Maybe, but maybe not!

The uncertainty of the election may be gone, but now there is the uncertainty of the UK’s membership of the EU. The Prime minister David Cameron has promised to hold a simple in/out referendum on the UK’s continued membership of the EU in 2017. For many, that poses a big risk to the economic health of the UK economy. Indeed, the mere fact that the UK could leave the EU could cause business to delay or even cancel investment in the UK economy, which could undermine Sterling’s strength.

We take a different view.

Our expectation is that the people of the UK will not vote to leave the EU. The world has changed and to leave would be a leap into the unknown. The Prime minister agreed to hold a referendum for tactical political reasons:

1.The UKIP party has campaigned on a platform of taking the UK out of the EU and this had taken some traditional support away from the Conservatives
2.There is within the Conservative party a group of Eurosceptic MP’s that also want the UK out of the EU and make life difficult for the Party leadership whether in or out of Government.

So, by agreeing to hold a referendum Cameron sought to spike the guns of UKIP and shut up once and for all the Eurosceptic wing of his own party. Once the markets fully under stand this and the pollsters start publishing regular opinion polls which we judge will reflect our view, the Pound will trade on economic fundamentals which we believe will strengthen further now that the uncertainty of the General Election is over

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Next story:
16th May - The Oil rally

Previous story:
1st May 2015 - UK Bonds and the Election

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