The European Commission, Britain and the Pound

Now that the European Commission had dealt with the spendthrift Greeks, their attention has shifted to Britain. The Times Online reported this morning:

"The Commission is due to release its latest assessment of Britain’s plans to reduce the deficit tomorrow, but a leaked draft makes uncomfortable reading for the Prime Minister and Alistair Darling, the Chancellor. It states: “The fiscal strategy in the convergence programme is not sufficiently ambitious and needs to be significantly reinforced. "A credible timeframe for restoring public finances to a sustainable position requires additional fiscal tightening measures beyond those currently planned.”

With both Greece and Britain running a deficit in the range of 12/13% of GDP, this makes the Brits fair game for criticism since this has breached the European Commission's stability rules. Coming a week prior to Gordon Brown's forthcoming budget, some see this as a tacit endorsement of David Cameron, the Conservative candidate.

The pound took a big hit on the 1st of March when a poll showed that the election was close and a hung Parliament might result. The fear was that this would leave the new prime minister weak, unable to forge a vigorous effort to remedy the deficit. Polls, however, are notoriously inaccurate when taken this far in advance of elections. The people questioned, the phrasing of the queries and issues are all designed to create news that favors the polling group's candidate. As the election draws closer, even the most bias polling agency will usually try to save some face and get closer to the final result.

From March 1 until the Ides of March the open interest in pound futures has grown dramatically, from about 128,000 contracts (futures only) to 181,000. The latest COT report revealed that the large spec trader, probably funds, was short a whopping 63,124 contracts, (futures and options combined). It is customary that the open interest grows in currencies as we approach the end of a contract month, but the growth since March 10, at over 32,000 contracts is robust. Yesterday's trade resulted in a 9,227 contract increase, a day when the bear tried and failed to break the market.

Today's reversal, after initially probing for stops under the 1.50 level with a subsequent rally to 1.5175, has to have the numerous bears a little squeamish. Perhaps today's FOMC notes, or the notes from tomorrows MPC meeting, or maybe even Britain's unemployment numbers, will provide the needed solace. Failing a decent dose of bear news, it looks like we may have the makings of a bear squeeze, which could pick up a little momentum above the 1.52.

For the more adventuresome, take a look at the pound/yen cross. Trading at 1.3740, this has bounced back from 1.32 low established on March 1, but there might be some more to go if the Bank of Japan says the right things in their Monetary Policy Statement tentatively scheduled for this evening. If they heed the Japanese Minister of Finance's requests and loosen the money supply, this should bear the yen versus the USD as well as the pound. Keep the stops in place and it is probably best not to wonder too far from the screen. Things may get a little lively. (Click to enlarge)

Disclosure: No positions