Gold prospers after break from the Dollar

The recent divergence of gold from the dollar reveals just bullish it is...

The Technical Trader’s view:

WEEKLY CONTINUATION CHART

The story of gold and the dollar is clearly a historical one of close association with only occasional divergence (for example in early 2009) but the divergence that began in February this year is dramatic and enduring.

Basically the relationship of Dollar strength and Gold weakness has fallen apart.

Can this move be sustained – or more specifically, the concern of this note is whether Gold is vulnerable to continued Dollar strength?

WEEKLY CHART

This market doesn’t look vulnerable.

The market was already well set up before the February divergence with Gold.

And the beginning of the divergence coincided with the completion of the bull falling wedge.

DAILY CHART

Since the completion of that wedge we can see that another continuation Head and Shoulders pattern has completed - minimum target 1250 or so.

The current bullishness of Gold is even more impressive because of the context of recent Dollar strength.

Watch for great additional strength on a break up through 1170.70

The Macro Trader’s view:

The Greek debt drama has continued to dominate most markets this week. Last Friday the Greek prime minister sought to activate the rescue package negotiated a couple of weeks earlier, only to find accessing the funds promised wasn’t that simple.

When the deal involving the EU, Euro zone and IMF was struck a couple of weeks earlier, the impression was given that the funds were readily available if Greece needed them. As part of the negotiating process Greece had to agree to a tough austerity package, leading markets to assume that as soon as a request for help was made, the Funds would flow.

But that soon proved not to be the case, as Greece and the markets found out at the end of last week. Germany sought fresh tough measures and assurances. With the German Government needing to pass legislation through parliament to provide its share of the funds, they were aware that German public opinion wasn’t supportive of bailing Greece out.

Although the German Government understood that failing to fulfil the terms of the agreement would do the Euro serious damage. But still they needed to persuade the Public and opposition that the rescue wasn’t just for the benefit of Greece but also necessary for the credibility of the entire Euro zone and Euro.

It now appears the Germans will be able to pass a bill through Parliament next week enabling the funds to be released. But the delay has come with serious costs.

The Greek sovereign credit rating has been downgraded to Junk. Portugal has seen its Sovereign credit rating reduced by two notches and Spain by one. The Euro was sold off hard against the dollar and equity markets took a hammering.

The odd thing was that Gold rallied –unlike its reaction in other periods of risk aversion driven by Greece, Previously, Gold was driven lower as traders bought the Dollar and Yen as safe-haven trades. This time traders still bought sought those safe haven trades, but with markets fearing a contagion effect, Gold has emerged as a stronger safe haven trade.

The main reason for this new gold reaction is that the major developed economies are all running large budget deficits and high debt to GDP ratios. And although the assumption is the US and UK will to a degree generate enough economic growth to make these deficits manageable, there are still risks.

In the US the Obama administration still plans big government spending that some analysts fear will push the debt to GDP ratio through 90%, a level regarded by most US analysts as the point where growth and productivity begins to suffer.

In the UK a general election campaign is underway and the outcome is unclear with a hung Parliament looking likely. The policy result could be that the new government adopts a slow path to correcting the budget deficit and shrinking the debt, rather than the Conservative intention of tackling the problem more aggressively if they win an overall majority.

So while the situation in Greece is far worse than any of these other cases, traders are aware that sovereign debt is no longer the gilt- edged investment it used to be and gold stands out as the one store of wealth independent from any one nations policies, either economic or monetary.

The result is clear: gold is likely to rally further regardless of the direction of the Dollar.

Mark Sturdy

John Lewis

Seven Days Ahead

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USD/CAD Slide Stalls At Long Term 76.4%

The FX Trader’s view - USD/CAD bears have continued to dominate, with recovery attempts soon petering out. A long term 76.4% pullback level has now been reached, with the market pausing here, and we currently await better reaction.

• WEEKLY CHART: The chart has finally tested the 76.4% level at 1.0000, also the centre of congestion from 2008. S/term support has been seen here, but we await a better reaction.
• DAILY CHART: On the Daily chart we keep in mind still the positive RSI divergence here, hinting at s/term bear fatigue. However, first resistance around the 1.0215 19-Apr high, corresponding with prior lows, needs to be overcome in order to shake off s/term risk of a break lower. Then, beyond the 1.0368 22-Feb low, the bear channel top projection around 1.0525 represents the next hurdle that must be negotiated, to raise medium term recovery expectations. Meanwhile bear risk remains present.

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Wheat to Springeth Green?

The Commodity Specialist view - The recent downward phase in Wheat (CBOT) began after the Nov-09 high, but evidence has been emerging of a loss of bear interest and we are now on the lookout for a recovery attempt.

• MONTHLY CHART - CONTINUATION: After the collapse in prices in 2008 the downmove slowed after testing the 76.4% retracement of the whole 1999-2008 upmove, also finding support from the lower 434 2002 high.
• DAILY CHART – JUL-10: In the Commodity Specialist Guide we have been noting the apparent 5-wave structure from Nov-09 high – now completed there is a good chance for a recovery phase. From the early Apr low the recovery has violated the channel top projection and 23.6%retracement level – an initial bull signal, subsequent pullback notwithstanding. We had suggested in the Guide that buyers on dips, above 480, would favour initial stops below the 460.50 low, probably targeting modest profits. Next resistance of interest is the Dec 539.00 low, which was effective in Feb. However, there would be later scope to the higher 563 area, 61.8% pullback and current position of an old rising return line.

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Short Sterling and the election

Until recently it was widely assumed in the market that UK interest rates were on hold for the rest of 2010. The Bank of England suggested that a spike in inflation would soon resolve to below-target CPI for much of the two-year forecast period. Well, the recovery has begun to look a little more robust. And there is one more variable, the General election. How does this have any bearing on UK interest rates?

The Macro Trader’s view:

How will the election affect the Short Sterling market?

Until recently it was widely assumed in the market that UK interest rates were on hold for the rest of 2010. The Bank of England suggested that a spike in inflation would soon resolve to below-target CPI for much of the two-year forecast period.

They advised that:

- with plenty of spare capacity in the economy resulting from the recession,

- a weak Pound,

- forecasts of a tepid recovery

inflation would remain tame and, indeed, the door was left open for future QE operations if needed.

Well, the recovery has begun to look a little more robust. And although some forecasters predict a second period of housing market weakness, that hasn’t occurred so far. Additionally, the Pound has weakened further during the last few months and inflation has proved more stubborn and more volatile than expected, making previous assumptions a little less certain.

But there is one more variable, the General election. Why does this have any bearing on UK interest rates? Simply put the UK is running a very large budget deficit and debt to GDP is running at 62%, much higher than before the financial crisis/recession hit.

The explosion of debt has added a huge stimulus to the UK economy, but now the economy is starting to recover that stimulus needs to be withdrawn, the budget deficit reduced and the National debt cut back down to size, (about 40% of GDP).

By and large the three party leaders agree the deficit needs reducing. They differ by how fast and by what means; tax hikes, tax hikes/spending cuts or spending cuts.

The opposition Conservative party had until a week or so ago looked on course to form the next government. They want to cut the deficit the most aggressively and by relying more on spending cuts with some tax hikes.

This would have removed the fiscal stimulus quite quickly meaning monetary policy would have needed to remain slack to continue aiding the recovery. Now though a hung Parliament really does look like the most likely outcome, meaning the deficit could be cut more slowly with tax hikes the preferred method. That’s if an agenda can be agreed and a government formed.

This option would see the Central Bank judging monetary policy would need to be adjusted upwards sooner than under the previous scenario and the Short Sterling market has sold off over recent days to reflect this new reality.

So the Short Sterling market cares very much about the outcome of the May 6 General election because the fiscal stance the new government takes, will dictate the path the Bank of England follows with regard to interest rates.

The Technical Trader’s view:

WEEKLY CHART

The market has been in a solid and consistent uptrend.

Note the substantial continuation Head and Shoulders pattern in the middle of the trend – but the minimum measured move has been achieved.

Note too, the possible weekly key reversal (only possible since we need to see the close tomorrow).

DAILY CHART

The detail is intriguing.

The bulls were excited about the way the market finally overcame the Prior High at 98.28, after having dithered there, but completing a flag formation.

But see how the last four days high volume price action has entirely smashed that bull break.

(1) The re-entry into the Flag as well as (2) the pull-back through the 98.28 Prior High support and (3) the break of the weak rising diagonal support ….. these are emphatically bearish, but there is no compelling top formation in place, yet.

In short, traders should wait for the close tomorrow (after the second Leaders’ debate) to see if the weekly Key Reversal is substantiated before taking a view.

Mark Sturdy

John Lewis

Seven Days Ahead

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EUR/GBP Slip Unnerves the Bulls

The FX Trader’s view - A short term bull signal seen earlier this year has essentially been negated now, following a deep pullback. Latest weakness has turned focus on key supports, and increases speculation that the EUR/GBP cross could be topping out.

• MONTHLY CHART: So far, the long term 38.2% retracement has proved supportive, but failure to move decisively away from this threatens to put it under pressure once more A break below here and the Jun-09 low near 0.8400 would favour medium term bears.
• DAILY CHART: After clear failure at resistance near 0.9150 the subsequent deep pullback recently found support from a 76.4% level. Bulls needed (and still need) a recovery back through the old return line around 0.8900 to see downside risk start to fade. But 76.4% support has given way now, exposing the 0.8593 Jan low (itself near to a longer term 76.4% level). A degree of support is likely here, but later failure would then see little in the way of a return to the Jun-09 low – further downside targets would also be explored in future editions of the FX Specialist Guide (e.g., the first interesting Fibo projection would come in around 0.8300).

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Bullish Green Shoots in EUA Carbon Emissions

The Commodity Specialist view - For the best part of a year a consolidation pattern has been unfolding in the EUA (ICE ECX) contract, activity quietening down notably this year. Bears have proved unable to drive the market below key support and, now, an interesting upside break is in process.

• WEEKLY CHART - CONTINUATION: The multi-month consolidation is changing character – early signs of a break upward are visible now. The 38.2% recovery level remains first key resistance on this long term chart – a break above this and we can start calculating higher targets.
• DAILY CHART – DEC-10: Earlier in 2010 the key 50% retracement came under pressure more than once – bears were expected to win the battle but in the end they lacked the will. In the Commodity Specialist Guide we have been keeping an eye on first key resistance around a small 76.4% bounce level and falling resistance line. This has now broken, providing an initial bull signal/ trigger. A further move beyond the 15.17 08-Dec high would violate the previous pattern of falling highs and lows. Also note the bull channel top projection around the same level, offering temporary resistance. Supports are offered by prior 14.04/13.60 highs – at this stage buyers on reasonable dips will ideally favour stops just below the 12.59 25-Mar low.

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Natural Gas Support Holding – Recovery Scope?

The Commodity Specialist view - The initial recovery in NYMEX Natural Gas from a 2009 low point came to a halt early this year, on the continuation chart. Subsequent pullback has now encountered interesting support, offering the chance for recovery, but bulls still await the required signals.

• DAILY CHART - CONTINUATION: On the Continuation chart a significant low point was seen in Sep-09 (though not apparent on the front month charts). It produced a Key Reversal Month, and heralded initial recovery. This year’s pullback has now found clear support from the 61.8% retracement – now see the Daily May-10 chart.
• DAILY CHART – MAY-10: In the Commodity Specialist Guide we will shortly be switching to the Jun-10 contract, but we stick with May here. S/term support has emerged from around the 3.850 1.618 swing projection (off prior Dec/Jan rally), close to 61.8% support on the Continuation chart. At this stage a recovery through the falling return line, i.e. a close above the recent 4.3340 high and coinciding 23.6% level, would sideline the bears s/term, and signal a recovery attempt underway. There could well be an initial struggle to clear resistance offered by the 4.656 03-Dec low, where the 38.2% level resides too, but there could be later scope for a push higher towards the next key overhead level around the 5.110 28-Jan low, where 61.8% and a Fibo projection (not shown) are also present. Meanwhile we must await the signal.

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EUR/CHF Trying To Reverse

The FX Trader’s view - Earlier this year, following a clear break lower, it looked as though bears in the EUR/CHF cross rate were running out of steam. However, a second wind saw a fresh move south which does, in fact, look like a blow-off move, with recovery prospects improved.

• WEEKLY CHART: The latest slip back saw a breach of the 1.4296 Oct-09 low, but it is proving a struggle to hold below this. A lower Fibo projection at 1.4040 stays out of reach for now. Note the recent type of ‘doji’ week on this candlestick chart, a week of apparent indecision with open and close near the same level.
• DAILY CHART: In the Commodity Specialist Guide we had previously suggested that a final, blow-off bear move was being seen. At this stage, though, the recovery to the 23.6% level of the whole Mar-09/Apr-10 decline now needs to be followed by a break/close above, in order to suggest a better rebound phase is underway. Then note next target around the 1.4640 38.2% level, which interestingly is near last month’s breakdown point (probably no coincidence, given the underlying Fibonacci forces at work – for that matter note how the Dec-09 break point corresponds with 76.4%). Along the way resistance from the 1.4559/76 prior lows area could have some effect. In case of s/term pullback keep in mind the support point around the 1.4229 24-Mar low.

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Gold is back in play

Our views on Gold have been well aired over the months, if not years. We are long-term bulls. But the market has suffered several steep and often protracted corrections that have on occasion endured for months. We judge the market is currently in such a phase, but shows signs that it is now coming to an end. Naturally we expect price action to resolve into a fresh leg of the long Bull Run. But what have been the dynamics behind the market over recent months and why now is it beginning to retest the upside?

The Macro Trader’s view:

Our views on Gold have been well aired over the months, if not years. We are long-term bulls. But the market has suffered several steep and often protracted corrections that have on occasion endured for months.

We judge the market is currently in such a phase, but shows signs that it is now coming to an end. Naturally we expect price action to resolve into a fresh leg of the long Bull Run. But what have been the dynamics behind the market over recent months and why now is it beginning to retest the upside?

The relationship between the Dollar and Gold has been well-established throughout the current financial crisis/recession. A weak Dollar translated into strong Gold. The Dollar was weak due to a steep economic downturn which led the US monetary authorities and Administration to pump in unprecedented amounts of stimulus, which led China and others to criticize, as they feared a debasement of their own massive foreign currency reserves, primarily Dollar-denominated. So far, so good.

But the Dollar began a strong recovery late last year as several key data releases, principally December 2009 Non-Farm Payroll, came in much stronger than expected. This coincided with the Dubai debt crisis, which led to a sharp rise in risk aversion, benefitting the Dollar as traders heavily bought into safe haven trades.

The Dubai crisis morphed into the Greek debt crisis, more safe-haven buying, all of which worked against Gold.

Now the Dubai crisis is off the radar and the Greek drama, while still rumbling on, now has a safety net, albeit of untested efficacy. As a result traders have largely turned their attention to economic fundamentals, which have improved throughout this year.

Indeed the US economy looks to be slipping into a familiar recovery pattern as both ISM surveys continue to strengthen and non-farm payroll last week reported a healthy 162,000 new jobs.

Why then should this benefit Gold? Surely, stronger US data will benefit the Dollar? Yes to a degree, and the last few days have seen the Dollar bounce on lingering Greek debt fears. |But Gold too has been a major beneficiary. As the US recovery deepens and risk aversion subsides, the Dollar loses its safe haven protection and becomes victim to the Feds low interest rate policy which Bernanke has reiterated will remain in place for an extended period, (several months). But, more important for the Dollar, is the US fiscal stance. The budget deficit under Obama has exploded and so too the debt to GDP ratio and recent health reforms compound the problem.

The Obama administration offers no credible plan to shrink the deficit, so while strong growth supports the Dollar, heightened concern about US public finances undermine it thus the Gold play can reassert itself.

If the US recovery runs true to past form, the current fiscal stance together with current monetary policy could easily resolve in higher inflation. Other countries run similar policy mixes, so the only asset class truly independent from national economic policies is Gold. It is the original form of money and store of wealth.

The Fed’s stance is understandable: they don’t want to act too soon, but will when they are convinced of a self-sustaining recovery. The Obama administration’s stance isn’t understandable. Short-term fiscal stimulus was not only good but very necessary, but as the economy recovers, the Government needs to wind down its spending and repair its finances. Their inability to address traders’ fears on this matter is why we see Gold as a long-term bull market

The Technical Trader’s view:

WEEKLY CHART

The power and potential of the continuation chart from mid 2008 resides in the completed Head and Shoulders continuation pattern set to drive the market up to1350 as a minimum.

Note too, the completed bull falling wedge…

DAILY CHART

But the force of the weekly chart becomes all the more clear when taken in conjunction with this additional Head and Shoulders pattern in the day chart.

The pattern completed yesterday.

A confirmed close above the neckline at 1134 today would sustain the bulls’ hopes.

The minimum measured move implied by the pattern? As far as 1245.

The bulls are in charge short, medium and long term.

Mark Sturdy

John Lewis

Seven Days Ahead

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The UK elections and volatility

With this week's announcement that the UK general election will take place on 6th May, what might be the consequences in the markets on volatility and therefore on option prices?

The UK elections and volatility

With volatility across all asset classes globally at or near recent lows the question is: where is volatility going now? Normally, an options trader uses low volatility to build up long positions ( going ‘long premium’) in the options market as increasing volatility drags up option prices. However, since the start of 2010 options traders who have used any sell-off in volatility to buy options have lost out in most cases as volatility has just fallen further.

With this week’s announcement that the UK general election will take place on 6th May, I would like to take a closer look as to what might be the consequences of the markets of various situations and outcomes on volatility and therefore on option prices.

To start off, I have included three diagrams of historical implied volatility on both the FTSE100, the 10 – Year Gilt future and historical 30 day volatility for the GBP/USD exchange rate. In all cases it is clear that volatility has fallen quite significantly and remains historically low. Although GBP/USD has risen in recent times, it is still low in the historical context.

How will the UK election affect volatility among these asset classes: equity, bond and currency?

There are two possible outcomes: one party will have a clear victory or no clear victory leading to a hung parliament.

In the case of one party achieving a clear victory we would not expect a big move in volatility as it will take time for the new government to formulate and introduce any new economic policy.

However, if there is a hung parliament it is quite likely that volatility will increase quickly. The reason for this is simply that the UK is not used to hung parliaments or coalition governments and this will therefore increase uncertainty.

Also, volatility is quite likely to increase in the time leading up to polling day as various different opinion polls show different outcomes. The closer the parties are tied the more the increase can be expected.

However, as we all know the only true and real opinion poll is the actual vote. Therefore, we can turn to the old saying “buy the rumour and sell the fact”. This implies it may well make sense to buy options at this early stage of the campaign and then sell the options when the result comes in at which stage the market will probably start discounting the reality of the new government however, it may turn out to be and UK markets will return to normal.

In the coming days Seven Days Ahead will looking for any opportunities to use to go long volatility in the UK market.

Of the three asset classes we prefer the Gilt market. The reason why the Gilt market will most likely see the biggest move is two-fold.

Firstly currently bonds are already at high levels in terms of price (low yields) therefore a sell off is quite possible.

Secondly, no matter what type of government takes over after the election, one of their biggest priorities is going to have to be tackling the public deficit. This may well add further to Gilt issuance which will have the affect of forcing yields higher (prices lower) over time. This therefore makes

Gilts are a good candidate for a long options strategy.

The main reason why we choose not to focus on the FTSE in the current environment is the fact that the FTSE is an extremely internationally-focused equity index. If we look at some of the largest holdings in the index such as Shell, BP, Rio Tinto and BHP for example they all have very little to do with the domestic UK economy.

Mark Ridgeway

Seven Days Ahead

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The Yen and the Euro's weakness

The recent weakness of the Yen and strength of the Euro has been short-lived. under the influence of short medium and long-term patterns we expect a test of the recent lows at 119.50 soon. And on a break moves further still towards the 115.50 level.....

The Technical Trader’s view:

WEEKLY CHART

The recent weakness of the Yen and strength of the Euro has been short-lived.

The block to further progress in chart terms has been the diagonal of a complex Head and Shoulders Top (or, indeed, the completion level of a Triple / Quadruple?) Top.

Note well the abrupt fall back from the close approach to that diagonal….

DAILY CHART

Those critical levels are shown to much greater effect on this day chart.

This is the completion level resistance of the multiple Top.

This is the neckline of the complex Head and Shoulders Top.

Note well the minimum move implied by the Head and Shoulders Top - around 115.50.

Now look closer.

DAILY CHART

A good measure of the force of the rejection of the 127 level has been the speed and unhesitating penetration of the support from the Prior Highs (in fact, the old neckline of a bull Euro Head and Shoulders Reversal) at 125.20/24.

The break of that support emphasizes the true weakness of the Euro.

We expect a test of the recent lows at 119.50 soon.

And on a break moves further still towards the 115.50 level…..

Mark Sturdy

Seven Days Ahead

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EUR/JPY base now complete

The FX Trader’s view - In a recent Update we noted that bears in the EURJPY cross rate were looking tired, although nothing bullish had been signaled at that stage. Latest action, however, has seen a short term base complete, with a bull signal now in place.

• WEEKLY CHART: Recent losses approached the 76.4% 118.45 pullback level, which is sometimes effective in EUR/JPY – we have been on the lookout for a rebound phase, which now looks to be underway.
• DAILY CHART: Last time we noted that the s/term structure was suggesting bears were losing interest - ahead of the 118.45 76.4% level. In the FX Specialist Guide we pointed out possible support from a very s/term 76.4% pullback level around 121.00, which in fact worked nicely – this proved the precursor to a break of resistance in the 125.20s. A base is now complete, with focus turning first to temporary resistance from the 126.89 Nov-09 low and bear channel top projection just above. However, the strength should be there to achieve higher values, though, so note the higher 130.90/131.30 Fibo retracement area which, in fact, coincides with an old textbook measuring technique. A collapse back below 121.00 would negate the bull signal, and this level now provides a risk level for buyers on dips.

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Cocoa Set For Temporary Recovery Phase

The Commodity Specialist view - year’s bear move in Cocoa was clearly signaled at the time (please refer to our 28th Jan Update), and has steadily unfolded. Recently in the Commodity Specialist Guide we have been looking at an interesting support area and this looks likely to prompt a rebound period very soon.

• WEEKLY CHART - CONTINUATION: After failing to sustain above the 2008 peak subsequent weakness has now seen violation of first main support from the 2919 Feb-09 high and 2882 38.2% level. This suggests bears have more to play for in due course, any s/term corrective bounce notwithstanding.
• DAILY CHART – MAY-10: The market has turned consolidative after testing/ eroding the 2813 Fibo projection (2.618 swing off prior 3245/3512 rally) which we had included in the 28th Jan Update. Note that the Feb-09 high on this chart was around 2800 – s/term support here is not a surprise. A positive RSI divergence suggested bears were tiring. We want to see a close above the 3000 area for a signal that a better recovery is underway – focus will then be on the 3220/45 area, 61.8% retracement and 28-Dec low, where good resistance should be seen. Buyers on dips have a clear risk level in the 2745 16-Mar low. We currently assume such a rebound will be the precursor to another bear wave.

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Has Sterling found its feet?

Until quite recently traders were almost queuing up to sell the Pound and there seemed an almost endless list of reasons to justify their bearishness. So why has Sterling suddenly bucked up?

The Technical Trader's view:

WEEKLY CHART

The market has been pressured down from the Double Top that formed beneath the resistance from the Prior Lows at 1.7050 and 1.6802.

The measurable minimum move implied by that Top was actually somewhat lower than where the market got to. Probably as far as 1.45.

But the support from the Fibonacci at 1.4860 has been considerable – plus that from the High at 1.5066.

That has certainly held up the bears.

But it may have reversed the move as well…

DAILY CHART

The Double bounce from the 1.4798 low is clear. As is the penetration of the (weak) falling diagonal around 1.51.

But the bulls should be wary of anticipating too much on the upside.

Only a break up through 1.5360 would really get them going by completing a Double Bottom

And that is a little way off.

The Macro Trader’s view:

Until quite recently traders were almost queuing up to sell the Pound and there seemed an almost endless list of reasons to justify their bearishness:

· The UK economy was the last of the major developed economies to emerge from recession,

· UK government spending had pushed the budget deficit to record levels with a rapid expansion of the National debt,

· The trade data remained deep in negative territory as it refused to adjust after a prolonged spell of currency weakness,

· Inflation never collapsed in line with official forecasts and remained above levels experienced in other G7 countries, and of course

· The political landscape looked challenging to say the least. With an election drawing ever closer, a hung Parliament looks likely making important difficult decisions look almost beyond agreement.

So why has Sterling suddenly bucked up?

Over the last couple of weeks one or two of the ear factors above have changed. True, a hung Parliament still looks the most likely outcome, and, whichever political Party emerges as the largest will have a difficult time trying to push through necessary public spending cuts/tax hikes.

But the economic recovery looks a little more robust:

- The Q4 C/A deficit released yesterday shrank to £1.7, a fraction of what was expected.

- The final version of Q4 GDP showed an upward revision; recovery will still remain a tepid affair, but talk of a dip back into negative growth looks misplaced.

- Inflation released the previous week corrected lower instead of the upward spike the markets had feared, and

- Retail sales, which are by far the largest chunk of GDP, recorded a month on month increase of 2.1% when released last week.

And despite a hung Parliament looking likely, politicians are at last starting to agree that the deficit needs to be cut. The disagreement now is about how fast and by what route: spending cuts, tax hikes or a mix of the two.

So now, when investors look at the UK and the Pound more specifically, they struggle to find new reasons to be bearish. Against all three major currencies, the Dollar, Euro and Yen, the Pound has rejected the lows. If the run of data can be maintained a recovery may be possible.

But the election result is likely the missing piece in the gig saw holding back a more robust recovery. Note well that if the Conservatives were to win, the Pound could rally again and smartly.

Mark Sturdy

John Lewis

Seven Days Ahead

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