Euro Market Update 8 June 2009

A widely expected "no change" vote from both the Bank of England and the European Central Bank was overshadowed last week by political upheaval in the UK. Rumours of Gordon Brown's imminent resignation, or of a general election were quickly dismissed by Downing Street, but the mere suggestion left the pound reeling. The markets couldn't decide whether the prospect of the current PM and chancellor staying put was a good thing or not, and instead focused on the uncertainty created by the furore. Markets detest uncertainly, and at a time when clear and consistent action is required to combat the recession, the economic implications of a change of chancellor are damaging market confidence, leading most analysts to believe that no change would be a good thing right now. Sterling took a pounding on Wednesday, things got even worse on Thursday, but we did manage to gain a foothold at 1.13 on Friday. The good news from the real economy last week was further confirmation from that inflation expectations are falling, allowing the BoE more scope to keep interest rates low in the near term.

The technical outlook is disappointing. We managed to close above the February high at 1.1575 last Monday, which should have signalled a clear "breakout" and a run higher; but the dramatic failure here and subsequent sell off leaves a dark cloud hanging over this market. We need to recapture the 1.1575 in order to negate this bearish omen, so clients with Euro requirements should strongly consider covering at least half now, while we are still trading close to six month highs.