Sterling rose to a two-month high against the dollar on Wednesday, just days before a British election that has so far put little of the expected pressure on UK markets. Most polls show the Conservatives and the opposition Labour Party neck-and-neck before the May 7 election, making a hung parliament likely. A month of uncertainty over the makeup and solidity of the government should follow.
Analysts have played up the chance of volatile moves in the pound as a result. Prices of options guarding against such uncertainty soared in February and March. But one-month implied volatility has begun to retreat the closer the election gets. Sterling itself reached a two-month high of $1.5438 after weak US GDP numbers on Wednesday.
"You can say the politics matters in the UK, but it certainly hasn't mattered over the last few days," said Daragh Maher, a currency strategist with HSBC in London. "We think that were it not for the election sterling would be around $1.61. But the run we have seen has mainly reflected a change in interest rate differentials between the US and UK." The US GDP numbers dominated afternoon trade, pushing sterling 0.7 percent higher against the dollar and weakening it 0.4 percent to 72.10 pence per euro.
Earlier, the pound had taken a boost from Nation-wide data showing house prices rose much faster than expected and at the fastest monthly pace since last June, another sign the domestic market might be starting to regain momentum. Against the dollar, sterling is up 3.5 percent since last Wednesday, when minutes from the Bank of England showed the central bank thought the rate tightening priced in by markets was "exceptionally slow". "The Nation-wide house price index plays into this idea that the Bank of England will be the next central bank to raise rates after the Fed, and that's supporting sterling," Rabobank FX strategist Jane Foley said.
She said that British investors might be focused on the election, but to international investors the differences between the main parties appeared small. That explained why sterling was not weaker despite the uncertainty of the outcome, she said. Still, some analysts say that currency investors will get more jittery about the election as the date approaches. "While we favour finding levels to sell sterling close to here, there isn't a catalyst readily available and the election continues to be ignored," Societe Generale macro strategist Kit Juckes wrote in a note to clients. "Sell and shut your eyes in sterling/dollar, or wait until after the weekend when the political uncertainty may finally become an FX market factor."
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