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Traders dump the pound of prospect of Lab/Lib pact

US Dollar:

The huge rally in global equities on the back of the massive EU bailout of Southern European states was well received yesterday, with the usual inverse relationship to the US currency sending the dollar south. The Dow Jones was up nearly 4%, FTSE 5% and the Cac40 up over 9% which saw investors come out of risk averse trades, selling the dollar and buying riskier assets. This saw the greenback fall a couple of cents against sterling to send GBP/USD over the $1.50 level, although the UK’s PM did a great job of helping the dollar with a speech yesterday early evening which sent more political uncertainty through the markets. Against the euro there was also dollar weakness, although this has been eaten away today as the single currency loses some of its gloss after the EU bailout. Data 15.00: IBD/TIPP Economic Optimism 48.9 from 48.4 & Wholesale Inven¬tories M/M 0.5% from 0.6%.     


The pound and British government bonds slumped yesterday within seconds of the revelation that Gordon Brown was to step down as Labour leader in a move seen as shortening the odds of a Labour pact with the Liberal Democrats. Traders dumped sterling and gilts on the assumption that any Lib/Lab administration would be slower to tackle the crumpling public sector finances and that whatever the eventual outcome, Mr Brown’s announcement would slow the progress towards a working government. It’s clear that the market wants certainty and that the news that Clegg is dilly-dallying between Labour and the Conservatives has not gone down well. Sterling, which strengthened earlier in the day against both the dollar and euro, flopped back down after Mr Brown’s statement. The pound, which had traded as high as $1.5053 on cable fell by more than a cent to $1.4863. Against the euro we had seen a rise to close to 1.17 pre Gordon Brown’s speech, then the crash and the pound fell over a cent to 1.1566. The twist was disappointing for the markets which want a quick resolu¬tion to this uncertainty. Markets were keener on the idea of a Tory government with Lib Dem support, largely because there is a perception they would cut the deficit sooner. The pound had been as low as $1,44 against the dollar at the end of last week but rallied after news of talks between the Tories and Lib Dems seemed to ease fears of political paralysis following a hung parliament. Its seems Mr Brown wanted one more chance to throw his toys out the pram before being evicted from the house, maybe he’s been watching too much Big Brother! Data 09.30: Manufacturing Production M/M 0.3% from 1.3% & Industrial production M/M 0.3% from 1.0%.


The euro is struggling Tuesday, down slightly against the dollar and pound as investors take a second look at the eurozone’s rescue plan. The plan basically helped to take the sting out of the contagion risk. On the flip side, there’s still no reason to get really excited about the euro. Its pretty disappointing the single currency only rallied a couple of cents on the back of a trillion dollars. The EU’s rescue package seems to have smoothed immediate fears of a spreading of the European debt crises. However, market sentiment is still fragile and the eurozones structural issues, including whopping budget deficits, still need to be addressed. As such, we suspect rallies in (the euro/dollar) towards $1.3050 will encounter stiff resistance in the short term. No major data.


• Jittery UK Shoppers spend less as political uncertainty takes hold. High street sales slumped last month, hit by the timing of Easter and pre-election jitters. The value of like for like sales fell by 2.3% in April, data from the BRC showed.



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GBP/USD 1.4835
GBP/EUR 1.1646
EUR/USD 1.2743
GBP/JPY 137.22
GBP/AUD 1.6518
GBP/NZD 2.0618
GBP/ZAR 11.1801
GBP/CHF 1.6466
GBP/CAD 1.5223
GBP/SGD 2.0509
GBP/THB 47.88
GBP/HKD 11.5419 red-down; blue-up (snap shot)

 These rates are for indication purposes only.


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