Sterling inches higher

Sterling rose on Tuesday after a survey of construction managers came in better than expected, reinforcing a brighter economic start to a year that also features political uncertainty. Growth in the industry reached a four-month high in February, the data showed, although building companies hired staff at the slowest pace in more than a year.
A gilt auction, while poorly bid, also helped the premium in British government yields over their German counterparts to rise. On 10-year debt, it reached 146 basis points. By late afternoon in London, sterling was up just under 0.1 percent at 72.75 pence per euro, near Monday's seven-year low of 72.35. Against the dollar, it gained 0.2 percent to $1.5388.
"Sentiment for the pound is positive this year," said Jake Trask, a corporate dealer with broker and currency payment company UKForex in London. "However, the uncertainty over the result of the General Election is causing a headwind for the construction sector, leading to some building companies delaying spending decisions." Sterling has been the strongest performer of the G10 group of developed world currencies over the past month, fuelled by expectations interest rates will rise in the next year. But an election in May could give half a dozen parties some influence on the shape of the next government, an unusual outcome for a British election.
Swedish bank SEB pointed to the limited impact of previous UK elections on sterling but also argued that this time may be different. "Considering the market's reaction to the Scottish independence referendum last year, we would hardly be surprised if, on this occasion, sterling were to react more negatively should the outcome remain this unclear as May 7 approaches," SEB analyst Richard Falkenhall said. Markets seem most concerned by the prospect of heavier spending and taxes and regulation of the financial sector under a centre-left Labour government.
A number of analysts say such a government, or a rightist one inclined to withdraw Britain from the European Union, could heighten concern over Britain's huge current account deficit and public debt. "Though sterling has benefited from cyclical tailwinds, it still has to contend with the structural headwinds in the form of a sizeable current account deficit," said Kamal Sharma, "The reliance upon capital flows to finance the burgeoning deficit is likely to come into stark focus in and around the General Election and supports our case for a reversal in recent action."