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Traders Find Refuge in USD

04/23/2010 12:01 am EST

Focus: FOREX

Ashraf Laidi

Founder, Intermarket Strategy Ltd.

The current pullback in equities adds to the USD gains, especially as the greenback benefits from Greek uncertainty and a further lead in the LDP's standing in UK election opinion polls.

With the downtrend in the EUR/USD firmly cemented, and the rebounds in GBP/USD lacking any follow up, what will become of EUR/GBP? Today, the pair fell to 0.8650, reaching its lowest since January 29. Greece remains at the top of immediate concerns for the euro, while mixed economic data and mixed pre-election polls are shaping up the medium-term dynamics for GBP.

Wednesday's release of the Bank of England minutes has reduced the likelihood of any renewed asset purchases by the central bank in the near term. But disappointing retail sales and rising joblessness remain a thorn in the side of sterling bulls. UK's fiscal woes have not ceased to exist, but the run up to the elections remains the most immediate determinant of sentiment and trading activity in the British pound.

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Last week's TV political debate punished the British pound amid escalating fears of a hung parliament, after more than 50% of those polled found the LDP's Nick Klegg to have won the debate. An improved showing in the LDP's election chances suggests marginalized majority for Tories or Labour, thus reducing the prospects of a clear parliamentary majority and eroding chances of passing deficit-reduction policies. General perceptions suggest a smaller likelihood of a Conservatives/LDP coalition than that of a Labour/LDP coalition.

The latest polls, according to Ipsos/Mori, show a doubling of support for the LDP to 23% from 12%, with Labour at 36% (-5%) and Tories at 32% (-6%). A continued lead in the LDP could cap sterling's recent gains versus the EUR, but add to recent GBP/USD losses. Thus, EUR/GBP could find support at the important 0.8650 level, which corresponds with the 100-week MA, before a brief a run up to 0.8720.

GBP/USD risks extending losses towards $1.51. With increased scrutiny being placed on Nick Klegg, questions will arise over his handling of foreign policy issues. In the event that Klegg's inexperience is contrasted with an improved performance by Gordon Brown, more losses in GBP should be seen. Labour's 13 years in power could also mean more room for criticism, which would subject Brown to be on the defensive, thereby weighing on his performance.

By Ashraf Laidi of CMC Markets

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