MARKET COMMENTARY: STERLING CONSOLIDATES... FOR NOW...

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Contributor / 2010-03-06 14:38:31

Not much movement overall yesterday on Sterling as the markets paused on selling the pound. This morning we have in fact made some gains back and as we stand we are holding just above the key 1.10 level and 1.50 on GBP/USD.

The 1.50 level on GBP/USD is a crucial level to hold above and will help to steady the ship and prevent further selling pressure. This morning we have seen UK PMI data come in much stronger than expected rising to 58.40 compared to the 55 expected and giving the best reading for over 3 years.

On top of this consumer confidence rose to 80 and a 2 year high as consumers look ahead to a brighter 2010 for the UK economy. The good data this morning was a huge breath of fresh air for sterling giving it a welcome break from the selling momentum.

So after being sold aggressively across the markets on Monday the markets have taken a breather and we now await the next move. First let us dissect why the drop in sterling which fell over 2% against the USD pushing it to a 10 month low. Well the focus is political with the opinion polls over the weekend indicating that the chances of a hung parliament were much higher- so why does this cause a problem?

A hung parliament may actually prove successful, however the markets do not like uncertainty and the consensus is that a coalition government will have less political clout to push through the decisive decisions especially in relation to tough fiscal planning which is inevitable.

The Conservatives came out of the traps on Tuesday stating that protecting the AAA status is central to their plans- however some feel their proposed aggressive cuts will be detrimental to recovery. On the other hand Labour propose to wait and cut later but waiting too long could mean that the horse has already bolted and the AAA rating could be lost.

So this uncertainty and division is leading to a weaker pound. Yes this could be good for the UK economy and for recovery but there is a fine line between a weaker pound and the loss of confidence in Sterling and the UK economy- this would lead to a sharp rise in import prices and inflationary pressure especially if commodity prices remain high- not good; this would spill into a pressure on the UK gilt markets and inevitably the UK losing the AAA rating adding yet more pressure. So you can see the problem that uncertainty is creating.

EUR/USD has picked up this morning beyond 1.36 following the leaked news of an austerity package for Greece totalling 4.8 billion euros. There is still uncertainty on the level of support that Greece will receive from the EU and the Greek PM tactically said that the cabinet may turn to the IMF if the EU does not give support- nice move…if we get further clarity on the level of EU support then this should lift the euro further. In addition it will help lead to selling pressure on USD and the JPY and hopefully boost the pound as confidence improves.

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