FX morning update - Sterling and Euro continue to look soft

By Michael Hewson

Date: Tuesday 02 Mar 2010

The pound continued to remain under pressure overnight after posting some of its biggest falls in months, and also making 25 year lows against the Australian dollar after the RBA raised rates to 4% overnight.
The pound hit its lowest level against a basket of currencies since March last year at 76.10. A number of reasons contributed to the declines, not least of which was investor fears of a hung parliament come polling day, and the lack of any credible plan to deal with the UK's deficit as well as speculation that the Prudential deal would require the execution of a large currency transaction to fund the deal.
A weekend poll showing that Labour had cut the Conservative lead in the opinion polls to 2 points also reinforced fears of a paralysis at the heart of Government after the election with respect to plans to deal with the deficit.

Yesterday’s UK figures were a combination of positive news, and some negative, but the M4 money supply data continued to show weakness and keeps the pressure on the Bank of England to consider further extending QE at this weeks meeting.
Sterling hit a low of 76.10 on its exchange rate index, its lowest level since March 31st last year.

The Euro continues to remain in the spotlight with investors seemingly optimistic about the prospect of a bailout plan for Greece this week. Someone seems to have forgotten to tell this to German Chancellor Angela Merkel as she continues to send the message that Greece would have to sort out its own problems which seems to be sending mixed messages to the market. EU Monetary Affairs Commissioner Olli Rehn yesterday told Greece that it must reveal new measures to allay officials’ concerns that the current austerity plan falls short.

Merkel wants Greece to do a lot more so any prospective aid package can be justified to taxpayers and political opponents who say that it shouldn’t be bailed out after living beyond its means. Failure to satisfy these demands before this week’s Berlin talks on March 5, will probably kill any hopes of a German-led lifeline, spurring investors to reverse yesterday’s rally in Greek bonds. The EU has clearly placed the ball in Greece’s hands and the market is watching and waiting for them to run with it and come up with the measures required to restore international confidence.

EURUSD – the lows around the 1.3450/60 area continue to support the Euro in the short term. The key 1.3485 Fibonacci support level continues to remain intact on a daily close for now. Talk of a German led 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 yesterday 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, something it was unable to do late last night in order to re-target the 1.5270 resistance area.

EURGBP – the cross blew away the resistance at 0.9040/50 yesterday morning, hitting a high of 0.9150 in the process, which was also the November and December 2009 highs.
This surge higher was short-lived and the cross pulled back below the 0.9040/50 area before rebounding. 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 over the last 24 hours as riskier plays take centre stage, trading between 89.00 and 89.45 for most of the time. 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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