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Wednesday May 5, 2010 - 13:13:41 GMT
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British Pound Firming; Investors Betting on Conservative Party Victory

The GBP USD trading better overnight as investors increased bets on a victory for the Conservative Party. No matter how the election pans out, traders are counting on the new government to mount a steady attack on the country’s huge budget deficit. This may mean the implementation of new taxes and austere cost slashing. U.K. voters realize that either a Conservative Party or Labour Party victory will mean aggressive action will have to be taken in order to avoid the same fate as the Euro Zone economies. Last week, both the S&P and Moody’s credit rating agencies said that a debt rating cut is likely depending on how the new government chooses to attack the country’s fiscal problems.


Technically, the British Pound is trading inside of a retracement zone at 1.5163 to 1.5078. Additional support is being provided by an uptrending Gann angle at 1.5087. The main trend is down, but this market appears ripe for a short-covering rally. A move above 1.5163 will indicate strength. Look for a possible acceleration to the downside if 1.5078 fails to hold as support.


The Dollar Index continued to rally overnight, touching its highest level since May 2009. After spending April trading on both sides of a monthly 50% level, the Index is now in a position to test the .618 price. Based on the major monthly range of 89.62 to 74.17, traders should look for the market to test 83.72 over the near-term. This market should continue to remain strong as long at 81.90 holds as support.


Weaker gold, crude and equities are helping to trigger a further rally in the USD CAD. After building a support base in April, this pair finally crossed a swing top at 1.0215 to turn the main trend to up on the daily chart. Upside momentum indicates that the March 26th top at 1.0302 is the next upside objective followed by a 50% level at 1.0366.

The weakening Canadian Dollar is most likely pleasing to the Bank of Canada which hinted last week that a strong currency is likely to have an impact on inflation and monetary policy. This led this analyst to believe that the BoC was intervening to weaken the Loonie. Look for the USD CAD to continue to strengthen unless there is renewed demand for higher risk assets.


The AUD USD is under pressure overnight due to renewed weakness in the U.S. equity markets. Early Tuesday night the Reserve Bank of Australia hiked its benchmark interest rate as expected by 25 basis points to 4.50%.


Based on comments from RBA Governor Glenn Stevens, this is likely to be the last rate hike for a while. Stevens feels that the RBA has reached its objective by bringing rates back to normal between 4.50% and 5.00%. He further added that he feels inflation was likely to remain in the upper half of the RBA’s target range.


Besides the weakness in the equity markets overnights and the falling demand for higher risk commodities, traders also remain a little cautious as to whether a tighter monetary policy in China will curtail demand for Aussie goods and services. Based on the main weekly range of .8577 to .9387, traders should look for the Aussie to correct to .8982 to .8886.


The NZD USD is falling in sympathy with the Australian Dollar and a lack of demand for higher yielding assets. Based on this week’s policy statement by the RBA, many traders now feel the Reserve Bank of New Zealand will wait until the second half of the year before raising rates.

The chart formation suggests that .7199 is a key pivot number. Falling below this level suggests a test of the point .618 level at .7163. The main trend is up and does not turn down unless the swing bottom at .7052 is taken out. The first clue that a change in trend is imminent will be the breaking of a long-term uptrending Gann angle at .7121.


The Euro continued to trade lower overnight, reaching its lowest level since February 2009. Although a bailout agreement was reached by the Greek government, the European Central Bank and the International Monetary Fund over the week-end, bearish traders have shifted their focus to the growing fiscal problems in Spain and Portugal.


Hedge fund and large traders continue to press the short-side. Short-term conditions are oversold, but there is no indication of a let up in the selling pressure. This type of formation typically ends with a closing price reversal bottom. Traders should start watching the 60-minute chart for clues as to whether bearish conditions are getting ready to shift.


Tomorrow the European Central Bank will hold a meeting. Traders expect interest rates to remain unchanged. The policy statement is expected to address that fact that rates will remain low for an extended period of time as the Euro Zone will need time to sort out its financial mess. ECB President Trichet is also expected to address the problems in Greece, Portugal and Spain. In his after meeting speech, he is most likely going to try to boost the confidence in Euro investors.


The weak Euro is sending the USD CHF sharply higher. Traders continue to expect the Swiss National Bank to intervene to defend its currency. Based the 12-month range of 1.1965 to .9918, the market is now trading inside the retracement zone of this range at 1.0914 to 1.1183. Look for this pair to continue to strengthen as long as the low end of the range holds with the upper end the next objective. The severely oversold Euro may trigger a short-covering rally in the Swiss Franc. Aggressive traders have to be careful about chasing this market higher.


The lack of follow-through to the downside in the U.S. equities markets is helping to underpin the USD JPY. A turnaround in demand for higher yielding assets is likely to trigger a positive response in the Dollar/Yen with a move through the former top at 94.77 likely. The daily chart indicates that a break through an uptrending Gann angle at 94.59 is likely to be the first sign of weakness and could lead to an acceleration to the downside. A resumption in stock market selling pressure should be the catalyst for this break.


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