GBP USD Plunges on Stronger Euro, Political Woes

The U.S. Dollar is expected to open higher this morning based on its strong overnight performance. Risk sentiment appears to be waning following early session strength. Commodity and equity linked currencies have reversed course after trading higher most of the overnight session.

The U.S. Dollar is expected to open higher this morning based on its strong overnight performance. Risk sentiment appears to be waning following early session strength. Commodity and equity linked currencies have reversed course after trading higher most of the overnight session.

The weakest currency is the British Pound. Overnight the GBP USD began to accelerate to the downside after running stops under 1.50. Traders tried to establish support at a major .618 level at 1.4854 but this also failed, sending the market to 1.4780. The new resistance is the 50% level at 1.5271.

Politics added to the negative sentiment hurting the British Pound this morning. Recent polls are indicating that the U.K. may have its first minority government since 1974. Investors believe that this could hurt the country’s efforts to cut its deficit. Also driving the Cable lower are reports that the EU is close to a resolution of the Greek budget issue. This helped trigger the early break in the British Pound when the Euro strengthened suddenly.

The Wall Street Journal reported over the week-end that Germany and France have a plan to bailout Greece with as much as 30 billion Euros ($41 billion). This came on the heels of a late session report on Friday by Bloomberg News which cited an anonymous source claiming that the German state-owned bank KfW Group may buy up to 25 billion Euros in Greek bonds as a precaution against other support means drying up.

Both stories indicate that a solution to the Greek budget deficit crisis is near. This is helping to keep the EUR USD inside a tight range of 1.3692 to 1.3443. A breakout over the high end of the range will turn the main trend to up. Breaking through the lower end of the range will reaffirm the downtrend and could lead to an acceleration to the downside.

The recent weakness in the Euro seems to be making the European Union nervous. In a statement released overnight, EU Monetary Affairs Commissioner Rehn urged Greece to announce more measures to shore up its budget soon. He also added that the EU was “sure we will overcome” the Greek fiscal challenge.

Stronger U.S. equity markets are a sign that investors may be holding on to the slight chance that risk sentiment will remain strong throughout the trading day. This may be the reason why the USD JPY is trading better this morning. Should equity markets turn down then look for the Japanese Yen to strengthen.

The weaker Euro is helping to boost the USD CHF. Once again, traders are taking a defensive stance against the Swiss Franc in anticipation of a possible intervention by the Swiss National Bank. The trend turned down last week when the USD CHF broke through a swing bottom at 1.0714. Although there was little follow-through to the downside, the trend will remain down unless the last main top at 1.0878 is violated. This is unlikely unless the Euro makes a new move low.

Weaker Gold and Crude Oil are helping to underpin the USD CAD. Traders are also expecting the Bank of Canada to leave interest rates unchanged at tomorrow’s meeting. There was early chatter that the improving economy may lead the BoC to drop a few hints that interest rates would rise shortly after June. Like the U.S., the Canadian economy is improving, but low employment continues to remain a key issue.

The AUD USD had a volatile overnight session. News that the manufacturing sector expanded at its fastest pace in two years helped to support it, but a report that the current deficit widened in the Fourth Quarter gave control back to the bears. In addition, a report stating that Chinese Manufacturing PMI fell more than expected indicates that its expansion is declining. This is not good for the Australian economy. Traders remain mixed about whether the Reserve Bank of Australia will hike interest rates at tomorrow’s meeting.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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