Ralph Shell @ 1:40 PM, Tuesday April 06 2010
Announcement the date for the dissolution of parliament and the new election has been scheduled for May 6th sent a short lived bearish tremor in the pound early today. Tory opposition leader David Cameron hastily commence the campaign to replace Gordon Brown as the new Prime Minister. The market shrugged off the news, and has bounced back from the morning low of 1.5127, currently trading at 1.5220.
The election fever may produce some unforeseen volatility. The polls give the conservatives a small percentage lead over the Labour Party, incumbents for the last thirteen years, but a generic ballot of the entire country may be misleading. There are 650 parliamentary constituencies, and the center right conservatives may be concentrated in only a minority of these districts. This prospect may result in a hung parliament which Reuters suggested this morning would make:
"An inconclusive election result is rare in Britain and is the worst-case scenario for financial markets, which want a clear outcome and firm action to tackle a budget deficit running at almost 12 percent of gross domestic product."
Britain, with a population of 62M and 650 members of parliament, has an bountiful supply of politicians. The US, with a population of about 310M, has a law permitting only 435 members of congress, and this seems to be more than enough politicians. Accurate polls from 650 districts is a daunting task, but as we get closer to the election, the polls generally become more accurate and enlightening.
Much of the British campaign will relate to the economy, taxes, and the budgetary deficit, and how each party will promise to solve the problems. Economic news released during the campaign period will be massaged and twisted by both parties to beautify their positions. Democracy in action is not pretty, but neither is a gaggle of common market bankers trying to extricate themselves from the Greek sovereign debt issues.
For the seventh straight day, the euro has lost of the pound. Starting at .9034, we are now trading at .8769. Betting that the pair is going to continue lower for an eighth consecutive day is usually a loser. The COT report may be one of the reasons for the relative strength of the pound. Large specs, while short futures in both currencies, have had a heavier concentration in the pound.
Versus the USD, the pound had a nice rally after checking out the 1.48 handle, back close to the 1.53 level, and has since meandered back and forth in preparation for the next move. The ability to trade better than expected today suggests there may be more to the upside in this pair. Let's try the long side of this pair in the 1.52 area with appropriate money management risks. If we take out the 1.53 area, this pair could run another couple hundred pips.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.