UK election dominates Pound with EU data mixed

The UK election is leaving the pound in a lurch verses other currencies as uncertainty continues to reign in the market over one of the closest elections in history. UK data this week has shown some positive signs, such as the Services PMI jumping to 59.5, but many in the market place are still worried about a hung parliament dragging on the pound.

At present, the market is betting strongly on the likelihood of a Labour led government at this stage and the markets are very efficient at picking winners in a tight horse race. I feel that a Labour led government will lead to increased spending in the public sector, which in turn could provide a boost to UK GDP in the long run with the UK economy continuing to show promise.

The EURGBP has seen some very strong movements on the back of Euro strength and Pound weakness, with the pair touching a three-month high at 0.7479. We could either see the Pound looking to regain control after the elections, or at least confirming that momentum for this pair has switched to the Euro bulls in the long term. I am keeping my eye on whether we get a retracement back to 0.7419 and then further bullish momentum.

In Europe, data has been quite mixed with German factory orders coming in at 0.9%. While it was below market expectations, it shows a steady recovery on last month’s negative data and that there is still expansion in the German manufacturing sector. Data from France has continued to disappoint with industrial production slipping to 0.3, and the trade balance worsening to -4.5B Euros.

While there is optimism that European data is improving and that a conclusion might finally be found to the ongoing situation in Greece, there are still worries in the market when it comes to France with its economy continuing to be the weakest in the Big Four when it comes to growth.

The Australian dollar was upbeat again today even as unemployment rose in line with the markets expectations of 6.2%. With the current demand for yield in the market its likely buying pressure will continue for the AUDUSD in the short term. Market expectations for further drops in the Australian dollar have not be in line with the Reserve Bank of Australia (RBA), leading to a likely confrontation between the market and the RBA in the near future. The RBA are likely to consider further monetary policy to devalue the currency further.

Oil markets showed a slight pullback after posting new highs at $62.56. The pullback could be either due to profit-taking or the market believing that there will be less demand based on gasoline surpluses. The push back down to $60 has been met with support at this stage, but new dynamics taking place in the Middle East (increased production from both Saudi Arabia and the UAE) could be playing a role in keeping oil prices depressed. Oil investment in the OPEC Middle East states is increasing significantly in order to keep supply levels high as oil rigs globally begin to lower production.

While oil (WTI) markets have rallied significantly as of late, I feel that with the added production from OPEC members and the probability that Iran will increase its own production will mean that it will take some time for Oil to ever reach over $100 again. Undoubtedly the recent market rally has been strong, but OPEC will look to turn on the tap to keep pressure up on unsustainable production off-shore to reign in market bulls.

Gold has failed to make further ground in trading as of late with global risk sentiment easing as a Greek deal looks probable. Optimism is also improving after recent data that the US economy is picking up. Current technical patterns show a tight wedge forming and a possibility of a retracement down to the $1178 level in current trading, followed by possible further bearish moves into $1169.

The Nikkei has had a minor correction as a strengthening Yen in the face of USD weakness weighs heavily on the heavily correlated Japanese equity Index. While the correction has been quite strong, it has so far found strong support in the market at 19168. The Nikkei may be having a correction, but at present it provides high yields compared to anything else in the Japanese market, and corrections are likely to lead to profit taking in this environment.