Austerity and UK election dominate FX markets

Greek austerity problems for the euro and the looming UK general election for sterling, ensure that once again the dollar has the momentum.

Euro and US dollar notes
Source: Bloomberg

Euro traders await ZEW report

Greece’s ability to embark upon reform and keep to its debt commitments continues to be a topic debated around trading floors. Bond markets have not been so indecisive and the record-high yields now being attached to short- and medium-dated Greek sovereign debt are a perfect example of the risk reward principle.

Last month saw the German ZEW data confirm that the start of the European Central Bank’s quantitative easing scheme had at least increased optimism even if the regional economic data has not, as yet, seen much of an upturn. This morning currency traders will once again be monitoring this to see if this optimism can assist in dragging the eurozone’s recovery back to life.

The 50-day moving average has proven to be a barrier to higher levels in EUR/USD, and the mindset of selling into bounces continues to be the strategy of choice. 

Spot FX EUR/USD chart

Cable fails to close above $1.500

We are now just 16 days away from the UK general election, and with every passing day the press is beginning to focus on the consequences of a minority government being the most likely outcome.

The difficulties that either the Conservatives or the Labour party would face in trying to govern the country from this unstable base would call into question all of the current perceptions the markets hold for the continuing recovery of the nation.

It is hard to believe that the full Implications of this situation have been factored into the GBP/USD price. It currently looks like the majority of price movements we have seen are down to the broader global macro issues rather than the looming internal problems.

Last week saw GBP/USD bounce and on an intraday basis break above $1.500 although fail to close above that level. In addition, the 50-DMA has proven to be a catalyst for the sellers to reappear. The closer we get to the election the more fully markets will factor in the negative consequences and a retest of this year’s lows looks inevitable.

Spot FX GBP/USD chart

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