Hello, and welcome to CantosCharts. My name's Michael Hewson from spread betting firm CMC Markets. And today I'm going to look at sterling and the possible effects that the last week's election result will have on the pound against a basket of currencies, against the dollar and against the euro.

So let's look at the sterling rate index, which is basically sterling's performance against the basket of currencies. And the chart that we're looking at at the moment is the sterling index from 8 January 2007.

Now as you can see, not unsurprisingly we've seen a significant decline in the pound over the past two to three years on the back of the credit crunch, concern about fiscal deficits and sovereign debt concerns as well.

Since the beginning of this year, the pound has settled down pretty much its lows of the last 12 months, trading in a broad sideways consolidation.

Now what I've done is, I've actually drawn two converging lines on this particular chart with an upper line coming in just above 80 and a horizontal line coming in around 76.40.

Now the all-time lows for sterling against the basket of currencies are currently around the triple lows around the beginning of 2009, which was 73.05. And that was round about the time that euro/sterling hit all-time highs of 0.98 and the pound hit 1.35 against the US dollar, which was its lowest level for over 20 years.

We've obviously since rallied back a little bit since then. But what we've seen over the past few months is quite a bit of volatility in the markets over the past week or so, especially given the election result, the pound against the dollar has traded between 1.44 and 1.52, euro/sterling has traded in quite a big price range as well.

So what's going to happen next? That's a very good question. And hopefully I'm going to try and explain the key chart points for the pound against the dollar and euro sterling.

But first and foremost, let's have a look at a quick history lesson on cable, or sterling/dollar. Now this is a cable chart since 1975. Now we can see, I've drawn two horizontal lines on this, and over the last 20 to 30 years we've traded in a very broad price range between 1.35 and 2.

Okay, we had a brief blip above 2 towards the end of 2007/beginning of 2008 when we hit 2.11. But pretty much since then, the pound has managed to find a pretty much good level of support around 1.3960.

Now this is a monthly line chart. So what you won't see on this is the interim month penetrations below the monthly close, hence the fact that there is no price activity below 1.3960. But this is quite important.

Since 1985 when cable made its all-time lows around 1.03 against the dollar, it has never closed below 1.3960 after it broke above it in late 1986. Okay? So if we draw that horizontal line all the way across here, cable has never closed below it on a monthly basis for nearly 25 years. So if it does close below 1.3960 we can expect a significant cable sell-off. So that is very, very important, we need to keep a close eye on that. Obviously we've traded below that in the interim time in 2003 and also 2008 -- or 2009, when we traded at 1.35, and we traded at just above that around 1.37 previous to that. But the big chart point from a monthly chart perspective is 1.3960. So between 1.39 and 1.40, very significant chart point on the downside.

So let's move on to a two-year chart. Let's bring it into slightly more relevant territory.

There's the low at 1.35, as indicated by that red line on the bottom of the chart. We've got the highs last year of 1.7045, got there at 1.7041. Since the beginning of this year we've traded in a pretty tight range. We've had a brief spike on Friday down to 1.4470, that's last Friday, which was quickly reversed. And we've managed to close above 1.4780 on each occasion. Now that 1.4780's quite a key level, because it's managed to find support there on a closing basis on at least three occasions since the beginning of 2010.

We've also got trend line resistance coming in just above 1.5520. So there is potential given the current volatility within the market for the cable to drag itself all the way back up to 1.5520, given the fact that there are a lot of short positions in sterling in the market at this time.

There are a lot of investors out there betting against a drop in the pound, looking for lower levels in the mid-140s, mid to low 140s. So these two key levels at 1.5520 and just above that, 1.56, keep an eye on those levels if we get up there, because we could see some selling interest. If we don't get up to those levels, there is another resistance level which I'm going to show you here.

Okay, this is 1.5120. Now if we look at this chart over the last month, we find that there's a significant area of support, one, two, three, four, five, six lows at 1.5120/125. We've broken below it, there is potential for a success back to 1.5120. If we break above 1.5120, then we can go back to those previous resistances that I referred to on the previous chart here. Okay? So that's sterling against the dollar. The key levels on a monthly close 1.40. On the upside 1.5520, 1.5120, sometimes acts as a pivot, so we need to keep an eye on that. So for the moment, sentiment is bearish for sterling. We would need to reassess that on a break above 1.5520, otherwise it looks to be a seller rally type of scenario.

So let's move on to euro/sterling. Euro/sterling has been pretty much a case of two drunks propping up a bar. Euro/sterling, no-one wants to own euros, no-one wants to own sterling. So what about sterling? It's traded pretty much sideways over the past five to six months, but albeit declining very slowly. Euros dropped off, dropped below its 200-day moving average which is outlined -- I've highlighted it in bold here. We dipped below these lows at 86 last week before recovering very, very rapidly on the hung Parliament result.

The euro/sterling needs to hold above 86, but also needs to get back above its 200-day moving average around 80/80.5 to push higher. For the moment, sterling is winning this particular war against the euro. It's slightly more wanted than the euro is, which isn't really saying an awful lot at the moment. However, maybe the euro bail-out this week could change that scenario, and we'll have to wait and see.

For the moment resistance on euro/sterling around 80/850, support on euro/sterling at 8/6 and also an 84, which is a two-year lows down here.

That concludes my overview of sterling. Thanks very much for listening.