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Liberal Democrats and Conservatives Making Progress in Britain

With Gordon Brown no longer entrenched at 10 Downing Street,  flirting with Klegg and the Liberal Dems, it looks like a coalition government with the Tories is emerging.  There had been fear that a Labour-Liberal Democrat would be bearish on the pound with some advisers forecasting the pound selling off to 1.35.  The global head of currency strategy for Morgan Stanley, Stephen Hull, had recommended a short pound long dollar position.

A short pound position has been very popular for the large specs.  The latest open interest report showed  this group a net short of over 65,000 contracts.  It looks like the OI has been growing since the end of the report.  Yesterday the pound OI increased by 7,751 contracts.   Many of the large shorts are likely currency or hedge funds, so it is not unusual for a clearing broker to tout the position of their big clients.

Over the weekend the British declined their invitation to contribute funds for the €500B rescue plan for the eurozone.  The reported today:

Jean-Pierre Jouyet said the UK would have to fend for itself if ongoing political uncertainty led to a meltdown in the financial markets.

“The English are very certainly going to be targeted given the political difficulties they have. Help yourself and heaven will help you. If you don’t want to show solidarity to the eurozone, then let’s see what happens to the United Kingdom,” he told Europe 1 radio. 

Credit should be given to Chancellor Alistair Darling for not participation in the massive euro bail out plan.  It looks like the markets are having some remorse about the week end plans to rescue the euro.  Perhaps it is a situation where no amount of money can resolve the differences between northern and southern Europe.  If that is the case and the Brits can somehow muddle through, form a conservative government that addresses some of the fiscal problems, the pound should continue to gain on the euro.

The euro did trade above the .91 handle in early March but has had a two month tumble to a little under .8450.   We previously noted that the pound futures OI was up sharply but the OI in the euro was up almost 40,000 contracts on yesterdays rally.  Should this pair get some further downside momentum, 84 should be the first target, with 80/82 a possibility. 


Disclosure: no positions