GBP surges on UBS comments of strong pound despite hung parliament

US Dollar: Dollar trading has been relatively subdued as of late with data out form the worlds largest econ-omy failing to disappoint or surprise. Heading into the weekend, currency traders were anticipating some whip¬saw price action as the news that Greece was attempting to activate the emergency EU and IMF aid pro-gramme and the G-7, G-20, IMF and World Bank summit taking place in Washington DC. Alas, no progress would be made on Greece; and commentary on the global economic outlook was generally uninspiring. For the dollar, this general lack of news led to a range bound start to the week. Event risk this week will come in the form of the FOMC interest rate decision due on Wednesday evening. We do not expect the FED to moves rates or even alter the language used in reference to monetary policy but several members of the committee are be¬ginning to question the ultra accommodative policy. Other data closely watched will be US 1st Quarter GDP due on Friday with the US economy expect to have grown by 0.5% in the first quarter.
DATA—US Case Shiller Index MoM/YoY (FEB) US API Oil/Gas Inventories (APR 23rd)

Pound: The pound rose sharply yesterday as currency experts at UBS said fears over the impact of a hung parliament on sterling were overblown. There will be a period of uncertainty as two of the three parties try to form a working coalition. But once this is done, the new government is likely to pass a summer Budget showing how it will deal with Britain's public finances. That should calm sterling fears, said Mansoor Mohi-uddin, MD of foreign exchange at the bank Sterling closed up by more than a cent against both the euro and the dollar on Monday, at €1.1606 and $1.5465 respectively. In a blow to the conservatives, UBS said the bigger threat posed to sterling would be an outright majority won by a party which started to cut the deficit "too quickly" something the Tories have said they will do as soon as the come to power. Any drop in productivity could push the Bank of England to resume quantitative easing – to the detriment of sterling The pound fell under similar circumstances in 1981, when the new Conservative government announced an austerity Budget. Sterling started to fall for sev¬eral years as the Bank of England responded to fiscal contraction by cutting interest rates sharply.
DATA—GBP BBA Home Loans (MAR), UK CBI Distributive Trends (APR)

Euro: The ongoing drama that is the Greek financial struggle rolls on with no real solution in sight. Last week, Prime Minister George Papandreou sought to activate the emergency loan facility provided by the EU and IMF. Given the long weekend and the discussions going on in Washington DC, hopes were high that an answer would be fast tracked. The danger for the single currency is the possibility of the debt crisis spreading with pre¬miums already being demanded on Portuguese bonds. Also in the firing line are Ireland and Spain who’s finan¬cial problems are not on the gargantuan scale of Greece's but any jitters in the bond market could cause a self fulfilling prophecy as higher financing charges for the indebted countries, finally push them over the edge. It is only reasonable to expect the EUR to remain under pressure with GBPEUR trading at 6 month highs and EU¬RUSD trading near to its FEB 08 low. Any break below 1.30 could will expose the 1.2850 level and possibly open the door to the mid 1.25’s
DATA—GER Import Prices MoM/YoY (MAR) FRA Consumer Confidence (APR)

General: US Senate Democrats failed last night in their attempt to press ahead with President Obama’s Wall Street crackdown. Republicans voted down a proposal to bring a financial reform Bill written by the Democrat Senator Chris Dodd to the floor of the Senate for debate. Democrats hope to hold another vote later this week.

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GBP/USD	1.5384
GBP/EUR	1.1571
EUR/USD	1.3340
GBP/JPY	144.35
GBP/AUD	1.6641
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GBP/ZAR	11.34
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