Just when we hoped that there may be a recovery in the UK the pound goes and kicks us where it hurts. While Sterling is still considerably lower than this time last year the benefits of the lower currency were rather redundant as the entire global economy slipped into recession. With the perma frost growth situation looking to thaw towards the end of 2009 (in my dreams) the last thing we need now is a resurgent pound.

The currency has bounced some 17pc from the lows of January and while much of the current rally can probably be attributed to short sellers being forced out of positions this does not detract from the fact that we are unlikely to ‘regain’ the lows. As mentioned yesterday the critical level was 1.5525 and when this was breached the reaction was almost immediate with massive buying entering the market. The currency comment over the last two days has been focused on the fact that, due to the dramatic fall in sterling last year, there is little volume or price resistance above the current levels versus the dollar until we get to around 1.67. The breach of what little resistance we had at 1.5525 rather focussed currency traders minds on this fact.

Indices markets took their cue from the currency gyrations with the FTSE falling through the session while the Dax, Dow and S&P managed to close on the side of the angels. A higher pound values UK stock at a richer ‘global’ level and foreign investors could book, not just some small equity gain but also a currency premium as well. This morning most markets are lower as we ponder the failure to break above the highs of earlier in the month. 4500/4515 in the FTSE is looking particularly difficult to breach and our clients made hay in the fall out yesterday as the heavy selling (mentioned in our comment) earned a nice little wedge for the bank holiday weekend!

Just as the markets spent most of April trading between 3900 and 4100 May seems destined to be stuck in the 4300 to 4500 range. This morning we are opening bang on the mid point of this at 4400 down another 70 points on yesterday’s close. There is a certain amount of mid market support at 3390 which may provide a spring board and we will have to see whether this holds but the momentum of the early action may have decided traders on the direction of the day. It must be said that the UK index is looking particularly weak versus other global markets just at the moment and if this continues there is a nasty chance that confidence will start to drain away once again.

The big gainer at the moment is our old friend ‘Gold’ with the daily spot price slowly grinding its way higher. While it is not yet pressing the highs at $1000 the recent weakness in the greenback has given a solid platform from which a spike higher may be built. Since the start of May we have moved some 65 bucks higher and we have had 11 up days in the last 14 sessions (even the reversals have seemed half hearted). It is difficult to believe that there is much in the way of short squeezing going on so the move higher is probably built on actual demand slowly dribbling into the market. Over the last few years the price of precious metals has tended to mirror activity in the equity markets and it is clear there are some fears of renewed financial turmoil leading to another run for the safe haven of the yellow metal. Our clients remain long (as they have been for the last three years!) but while the prospects look positive half aneye should be focussed on the dollar and other asset prices. If these start to look stronger then Gold may experience a pull back.

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