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FX afternoon update - Sterling hammered on hung parliament fears

By Michael Hewson

Date: Monday 01 Mar 2010

FX afternoon update - Sterling hammered on hung parliament fears

The pound came under fresh attack today dropping through a host of support levels as investor fears of a hung parliament come polling day, and the lack of any credible plan to deal with the UK's deficit finally came home to roost.
A weekend poll showed that Labour had cut the Conservative lead in the polls to 2 points reinforcing fears of a paralysis at the heart of Government after the election.
Today's UK figures were a combination of positive news, and some negative, but the M4 money supply data continues to show weakness and continues to keep the pressure on the Bank of England to consider further extending QE at this weeks meeting.
The prospective Prudential takeover of AIG's Asian unit may also have played a part in the decline as it looks to fund the purchase.
Sterling hit a low of 76.10 on its exchange rate index, its lowest level since March 31st last year.

The Euro continues to find support around its lows at 1.3460 on optimism of a bail-out being agreed this week in Athens. However, German Chancellor Angela Merkel's intervention at the weekend that Greece would have to sort out its own problems continued to send mixed messages to the market.

EURUSD – three lows around the 1.3450/60 continue to support the Euro in the short term. The key 1.3485 Fibonacci support level remains intact on a daily close for now. Rumours of a bail-out plan continue to lend some support in the short term, and could see the Euro push up towards 1.3720, but changes nothing with respect to the longer term downside risk of a move towards 1.3200.

GBPUSD – cable plummeted earlier today hitting a low of 1.4783 as investors bailed out after it dropped through the psychologically important 1.5000 area. The key level on a daily close is 1.4850 which is the 61.8% Fibonacci retracement of the up move from 1.3500 to 1.7045.
The pound now needs a recovery back above 1.5020 to try and stabilise in the first instance, to re-target the 1.5270 resistance area.

EURGBP – the cross blew away the resistance at 0.9040/50 this morning, hitting a high of 0.9150 today, which was also the November and December 2009 highs.
However this blow-off was short-lived and the cross has since pulled back below the 0.9040/50 area. The Euro should find support around the 0.8980 and as long as the Euro can stay above the 200 day average currently at 0.8830 then further upside could well be possible. Let the battle of the uglies begin.

USDJPY – the yen has been pretty much sidelined today, trading between 89.00 and 89.45 for most of the day. It continues to trade at the upper end of its recent range, as it continues to strengthen and benefit from a certain amount of risk aversion.
A move to 88.25 remains the risk, while a break above 89.50 could see a gradual move back towards 90.00.

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