The currency blog

Today’s election marks the end of a frantic month of campaigning for the three main parties. The latest polls show David Cameron holding a slight advantage going in polling day, but the unique nature of the build up has transformed the election, and the Pounds fortunes along with it. The strong performance of Nick Clegg in the televised debates increased the probability of a hung parliament and the market has kept Sterling depressed ever since. If we see a majority Government, in all likelihood led by David Cameron, we expect to see a strong rally against the Dollar and especially against the Euro on Friday. If we see a hung parliament, the picture becomes a murkier. Sterling will likely fall, but by how much and for how long will be a function of the time it takes for the parties to hammer out a deal. Since this situation does not generally happen in the British electoral system and even with the best efforts of the top civil servants (who have been visiting countries with coalition governments so see how the process works) it is far from clear how long we might be without an elected government – and if there is one thing markets don’t like, it is uncertainty.

Speaking of which, the Greek situation continues to deteriorate. EuroDollar lost almost two cents yesterday as continued worries over a Greek default and contagion fears in other Eurozone countries played on the minds of investors. At one point EURUSD broke through 1.28, the lowest level since March 2009. Today, the ECB meet for it’s monthly interest rate decision, with the actual decision widely expected to be an non-event. That said, the press conference afterwards will be closely watched for any mentioned of the possibility of the ECB buying bonds (QE or printing money to you and me) and any further developments in the bailout package. Leading economists continue to be sceptical on the success of the proposed bailout – history is littered with examples of countries receiving money from the IMF and then promptly defaulting. Whether Greece defaults will increasingly be decided not by their ability to pay, but rather by their willingness to. From pictures reported yesterday of the strikes, and with more planned next week, it looks likely that some sort of debt restructuring will eventually have to be implemented.

Over in the US Fed Chairman Ben Bernanke speaks today along with Charles Evans (also of the Fed) and both speeches will be closely watched for any changes in tone. With the Dollar rising across the board thanks in part by all the problems affecting the Eurozone, it will be interesting to see if there is any mention of exchange rates, the recovery is still fragile and the Fed will not want to derail this with a large move in USD. In a light data day, we also have US Initial Jobless Claims & UK PMI.

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