British Pound finishes Higher; Election Compromise in the Works

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

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

The break began when the Liberal Democrats made a formalrequest to join the coalition. The weakness late in the session demonstratesthat investors want to see a clear-cut plan by the next parliament to balancethe budget and reduce the deficit. The request by the Liberal Democrats to jointhe Labour and Conservative parties at the planning meeting made tradersnervous about the possibility of a hung parliament.

The strong rally in U.S. equity markets helped to driveup the USD JPY. The strong rally was actually a combination of less demand forlower yielding assets and the sale of 2 trillion Yen by the Bank of Japan lastweek.

Stronger demand for higher risk assets driven by sharplyhigher crude oil and equities helped to drive the USD CAD sharply lower. Basedon the short-term range of .9929 to 1.0738, the main downside target was 1.0333to 1.0238. This area was tested overnight, stopping the break in the process. Abreak under the .618 price level at 1.0238 should trigger an acceleration tothe 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. Regainingand holding above this price could trigger a further rally to .9128.

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

The NZD USD was in a strong position most of the tradingsession. The first reason for the rally was greater demand for higher yieldingassets. The second reason for the rally was speculation that the Reserve Bankof New Zealandwill begin hiking interest rates sooner than expected.

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

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

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

While it is clear that the short-term fix proposed by the EUto 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 overthe long-term.

The $1 Trillion rescue plan was able to move the Euro about2% overnight, but it failed to do anything to address the irresponsible deficitspending habits of Portugal,Spain and Greece and any other peripheralEuro Zone nations which may face similar issues later on. This fact furthersupports the thought that the EU powers are not going to get control of thegame until they propose and implement a plan that will help them wrestle controlof the Euro away from the hedge funds.

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

Technically, the Euro stopped rallying after slightlyovershooting a .618 retracement level at 1.3038. With the Euro bottoming lastweek at 1.2518 and topping this morning at 1.3093, traders should look for apull-back into the 1.2805 to 1.2738 range. If the Euro is going to move higherthen fresh buyers will step in at this zone. A failure to do so will drive themarket to new lows.

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

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

Disclainer: