Sterling hit a seven-week high against the dollar on Wednesday, boosted by solid UK economic data, with some analysts saying the prospect of a hung parliament after May's election looked to be priced in. Strong British retail sales data and a pronounced narrowing in the trade deficit on Tuesday added to a run of figures that helped to boost optimism about the UK economy.
While broad losses in the greenback on Wednesday also helped support the pound. Evidence that the economy is faring better than expected has prompted a slight recovery in the pound, which has been knocked by concerns about Britain's mounting debts and uncertainty linked to the election outcome. "UK fundamentals appear to be doing better than in the past few months," said Jane Foley, research director at Forex.com in London.
"Whilst there remains significant clouds in the form of the budget deficit and the election, if we have better growth prospects, that will ease the budget deficit issue and it should provide scope for any government that comes in to deal with the deficit." At 1539 GMT, sterling had climbed 0.7 percent on the day to $1.5492, its strongest since late February.
The pound basked in the afterglow of data showing the trade gap shrank to 6.2 billion pounds in February from more than 8 billion pounds in January, while a reading of retails sales showed a sharp rise month-on-month rise in March. Also supporting sterling was broad weakness in the dollar, which was stung by a rise in risk appetite following upbeat US corporate earnings and Singapore's effective revaluation of its currency.
Traders said sterling buying on Wednesday was coming from Asian sovereign and Swiss accounts, while technical analysts said the outlook was now reasonably positive for the pound. Wednesday's gains pushed the pound decisively above its 55-day moving average around $1.5348, which some in the market said was a positive signal for the currency. The last time the pound traded clearly above that moving average was in December 2009.
The euro slipped 0.2 percent to 88.27 pence, having fallen as low as 88.06 pence earlier in the day. Concerns about a hung parliament pushed sterling down nearly 6 percent against the dollar in the first quarter, leaving the market with overstretched short positions in the UK currency. Some traders have begun to unwind these positions, and analysts say this may provide an additional boost to the pound in the near term.
Britain is still looks to be heading for an inconclusive election, latest polls showed, but they differed on which party would emerge as the largest at the May 6 ballot. Analysts said that uncertainties about the election- particularly who may win the election, and whether a majority could be achieved - may continue until voting day on May 6.
Still, some said that many in the market had already priced in these concerns, and that further, significant losses on the back of election jitters may be limited, especially if economic data continue to come in strong. "The polls are pointing to a hung parliament and maybe that's in the price for sterling. People are more relaxed about it," said Stuart Bennett, senior currency strategist at Credit Agricole.
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