UK election on May 6th - prospect of hung parliament hangs over sterling

US Dollar:

The dollar is gaining against the euro and yen Wednesday as concerns over Greece’s fiscal troubles continue to linger, but the greenback has seen a small setback against a higher pound on better than expected UK eco-nomic data. There was a small reprieve for the euro with the release of minutes from the Fed, which suggested no imminent change in the central banks ultra loose monetary policy stance. But the euros gains were limited against the buck as the minutes kept the same policy outlook. Over the long run, the language is still consistent with an improving economic backdrop, which would eventually lead to higher interest rates and stronger dollar gains. Data 15.30: Crude Oil Inventories. 20.00: Consumer Credit. Speakers 10.00: Treasury Sec Geith¬ner, 17.15: FOMC Dudley, 18.30: Fed Chairman Bernanke, 19.00: FOMC Hoenig.

Pound:

Sterling has continued to rally against its European counterpart and seen a small pull back over the rallying dol¬lar. The pound has benefitted from better than expected UK economic data in the form of the British Chamber of Commerce, which said the UK has avoided slipping back into recession, but did state the recovery is weak and there remains a serious risk of a setback as the government gears up for the election. The UK jobs market also gathered pace in March as the rise in permanent placings was the strongest since October 1997. But the main focus for sterling’s path will be closely linked to who wins the UK election, with the election campaign in full swing, traders will be concentrating on polls and news flow more than ever. Political uncertainty will keep ster¬ling underpinned, as the prospect of a hung parliament, which is looking more and more likely as the polls show a close contest, would hurt the value of sterling. The main focus will be around the UK economy and the coun¬try’s debt repayment, with a possibility of a credit rating downgrade, should the debt levels not be paid sooner rather than later. Data 09.30: Services PMI expected 58.1 from 58.4 & Index of Services.

Euro:

The euro fell Tuesday as worries over how Greece would finance its sovereign debt once again sent investors fleeing the common currency. The concerns over Greece helped bunds rise from the days lows as risk appetite faded. It has become clear that the EU standby agreement has yet to achieve the prime aim of reducing Greek borrowing costs by assuring nervous investors that the EU would step in to prevent default. The market really wants the Greeks stick with the deal they made, but the feeling is they may not. This saw the euro give up a percent against a recovering pound, to push EUR/GBP under the 0.88 level, hitting 0.8770. The euro also re¬sumed its decline against a rallying dollar as another half a cent was given up to see EUR/USD fall below the $1.34 level. Data 09.00: E/Zone Final Services PMI 55.5 unchanged. 10.00: Final E/Zone GDP q/q 0.1% unchanged. 11.00: German factory orders m/m expected –0.8% from 4.3% previous.

General:

• Japan’s central bank on Wednesday kept its key lending rate unchanged at 0.1% and maintained its outlook that the pace of recovery in the worlds second largest economy will remain tepid. While Japan’s economy is picking up thanks to recovery overseas markets and stimulus measures, there is not yet sufficient momentum to support a self sustain¬ing recovery in domestic private demand,” it said in a statement.
• Oil prices were higher at $86.94 per barrel ahead of a closely watched government report on US stockpiles.

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GBP/USD	1.5261
GBP/EUR	1.1403
EUR/USD	1.3386
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