LONDON, May 14 (Reuters) - Sterling's deteriorating
technical outlook against the dollar serves as a reminder to investors that optimism for UK assets since a new British government took power may not be enough to prop up the pound.
Sterling fell to a one-year low last week as the election produced no clear winner, leading to five days of talks between party leaders.
The formation earlier this week of a Conservative/Liberal Democrat coalition boosted the pound, taking it briefly back above $1.5000.
However, sterling subsequently came within one U.S. cent of last week's low of $1.4475, opening the door to further downside.
'Last week the market eroded the 15-month uptrend from the January 2009 low at $1.3500 and the longer-term risk is on the downside against the dollar,' said Karen Jones, head of technical analysis at Commerzbank.
'Longer-term, we continue to target $1.4255, the 78.6 percent retracement of the move throughout 2009.'
Jones added the $1.4255 Fibonacci level was the last defence for the pound ahead of the $1.3500 2009 low.
For the downside pressure to be taken off, key resistance at $1.5055, the May 10 high, would need to break, according to Taso Anastasiou, technical analyst at UBS in Zurich.
'It is in a downtrend and I think the risk is we test last week's lows again. If that area gives way, we are looking at $1.4112 as next support, previous weekly lows from April 2009,' he said.
Credit Agricole CIB is also bearish on the pound. 'Sterling/dollar is still trending lower on the daily charts. Spot is staying below its 20-week moving average. We would hold a 6-week $1.4930 sterling put option,' they noted.
Bank of Tokyo Mitsubishi UFJ recommended investors sell sterling, targeting $1.3800 -- 7 percent off current levels.
FAVOURABLE OUTLOOK VERSUS EURO
In contrast to the negative outlook for the pound versus the greenback, analysts say the outlook against the euro was looking much more favourable.
'Euro/sterling key support is at 84.00 pence, the June 22, 2009 low. A break below there reinforces the strong bearish trend,' UBS's Anastasiou said.
He said the next target below there was 82.36, the November 20, 2008 low.
Commerzbank's Jones said euro/sterling was staging a short-term bounce but she highlighted a plethora of resistance levels based on weekly moving averages which she said were likely to cap rallies.
'The market has major support at 84.25 and 84.00, a 7-month channel and the 2009 low. Below 84.00 will see the 81.70 downside target engaged,' she said. Keywords: MARKETS/FOREX STERLING
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