FX Refuge into USD from Greece, UK Debate
The current pullback in equities adds to the USD gains especially as the greenback benefits from Greek uncertainty and further lead in the LDP's standing in UK election opinion polls.
With the downtrend in the EURUSD firmly cemented, and the rebounds in GBPUSD lacking any follow-up, what will become of EURGBP? Today, the pair fell to 0.8650, reaching its lowest since Jan 29. Greece remains at the top of immediate concerns for the euro, while mixed economic data and mixed pre-election polls are shaping up the medium term dynamics for GBP.
Yesterday's release of the Bank of England minutes have reduced the likelihood of any renewed asset purchases by the central bank in the near-term. But disappointing retail sales and rising joblessness remain a thorn in the side of sterling bulls. UK's fiscal woes have not ceased to exist, but the run-up to the elections remain the most immediate determinant of sentiment and trading activity in British pound.
Last week's TV political debate punished the British pound amid escalating fears of a hung parliament, after more than 50% of those polled found LDP's Nick Klegg to have won the debate. An improved showing in the LDP's election chances suggests marginalized majority for Tories or Labour, thus reducing the prospects of a clear parliamentary majority and eroding chances of passing deficit-reduction policies. General perceptions suggest a smaller likelihood of Conservatives/LDP coalition than that of a Labour/LDP coalition. The latest polls according to Ipsos/Mori show a doubling of support for the LDP to 23% from 12%, with Labour at 36% (-5%) and Tories at 32% (-6%). A continued lead in the LDP could cap sterling's recent gains vs. EUR, but add to recent GBPUSD losses. Thus, EURGBP could find support at the important 0.8650 level, which corresponds with the 100-week MA, before a brief a run-up to 0.8720. GBPUSD risks extending losses towards $1.51. With increased scrutiny being placed on Nick Klegg, questions will arise over his handing of foreign policy issues. In the event that Klegg's inexperience is contrasted with an improved performance by Gordon Brown, more losses in GBP should be seen. Labour's 13-year in power could also mean more room for criticism, which would subject Brown to be on the defensive, thereby, weighing on his performance.