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Tuesday May 11, 2010 - 00:28:21 GMT
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British Pound finishes Higher; Election Compromise in the Works

The GBP USD opened higher driven by spillover buying from the Euro, but by mid-session was trading well off its high. The initial rally was triggered by the possibility that the two major political parties - Labour and Conservative - were working together to map a plan for a balanced budget despite the possibility of a hung parliament.


The break began when the Liberal Democrats made a formal request to join the coalition. The weakness late in the session demonstrates that investors want to see a clear-cut plan by the next parliament to balance the budget and reduce the deficit. The request by the Liberal Democrats to join the Labour and Conservative parties at the planning meeting made traders nervous about the possibility of a hung parliament.


The strong rally in U.S. equity markets helped to drive up the USD JPY. The strong rally was actually a combination of less demand for lower yielding assets and the sale of 2 trillion Yen by the Bank of Japan last week.


Stronger demand for higher risk assets driven by sharply higher crude oil and equities helped to drive the USD CAD sharply lower. Based on the short-term range of .9929 to 1.0738, the main downside target was 1.0333 to 1.0238. This area was tested overnight, stopping the break in the process. A break under the .618 price level at 1.0238 should trigger an acceleration to the downside.


The AUD USD closed up in response to the sharply higher U.S. equity markets. Monday’s rally stopped at a 50% price level at .9047. Regaining and holding above this price could trigger a further rally to .9128.


The main trend remains down despite the rally. This makes this market susceptible to a near-term correction back towards the low in an effort to build a secondary higher bottom.


The NZD USD was in a strong position most of the trading session. The first reason for the rally was greater demand for higher yielding assets. The second reason for the rally was speculation that the Reserve Bank of New Zealand will begin hiking interest rates sooner than expected.


The Euro finished higher but finished well off its high on Monday. This was expected since the announcement by the European Union to inject close to a trillion Dollars into the Euro Zone financial and economic system triggered a short-covering rally but failed to attract new buying.


Traders are now looking at the move by the EU as a short-term fix to a long-term problem. The arrangement by the EU looks more like a panic move triggered by pressure from the global economic community. The size of the aid package itself was larger than any bailouts previously concocted by other central banks including the U.S. Federal Reserve.


The very size of the amount of money proposed by the EU and the subsequent reaction by the Euro brings into question whether the aid proposal is designed to save the Euro as a currency or increase the Euro’s value. Although short-covering helped drive the market higher initially, the way the Euro finished suggests that short-traders are still concerned about the underlying major problems in the Euro Zone.


While it is clear that the short-term fix proposed by the EU to buy the government debt of Portugal, Spain and Greece is supportive at this time, it isn’t clear what this aggressive proposal will do for the Euro region over the long-term.


The $1 Trillion rescue plan was able to move the Euro about 2% overnight, but it failed to do anything to address the irresponsible deficit spending habits of Portugal, Spain and Greece and any other peripheral Euro Zone nations which may face similar issues later on. This fact further supports the thought that the EU powers are not going to get control of the game until they propose and implement a plan that will help them wrestle control of the Euro away from the hedge funds.


The lack of clarity by the European Union has been a major concern for investors throughout the entire Greek episode. This weekend’s proposal has triggered a similar response. Sure it is easy to see the short-term ramifications, but what about the long-run. Doubts also are beginning to surface about the execution of the plan. This sets up the Euro for a period of volatile trading and most likely another test of the recent low.


Technically, the Euro stopped rallying after slightly overshooting a .618 retracement level at 1.3038. With the Euro bottoming last week at 1.2518 and topping this morning at 1.3093, traders should look for a pull-back into the 1.2805 to 1.2738 range. If the Euro is going to move higher then fresh buyers will step in at this zone. A failure to do so will drive the market to new lows.


The action by the EU sets up a classic battle between the governments of Europe and the hedge funds. Although the EU made a move which caught the markets by surprise overnight, the hedge funds still seem to be calling the shots. The battle lines have been drawn at 1.2805 to 1.2738.  Investors should know in a day or two whether the EU proposal will be given the benefit of the doubt or if it will go away with hardly even a whimper.



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