Sterling slips against dollar

Sterling fell against a buoyant dollar on Wednesday after UK industrial data fell short of expectations, slightly dimming some of the optimism that recent robust data had generated about the British economy. Industrial output fell by a monthly 0.1 percent, compared with a forecast for a 0.2 percent increase from economists taking part in a Reuters poll. Manufacturing output slid 0.5 percent in January from December.
Sterling fell 0.2 percent to $1.5044, having traded around $1.5055 beforehand. But it extended gains against the euro, hitting a more than 7-year high of 70.48 pence against the struggling euro. The euro has been hit broadly since the European Central Bank kicked off its 1.1 trillion euro asset-buying programme at the start of the week. That sent yields on the debt of nearly all euro zone countries to record lows on Wednesday and widening the gap over British bonds.
While sterling's gains against the euro kept the currency higher against a trade-weighted basket of currencies, it slipped against the dollar after the disappointing British data. "The industrial production number coming in below expectations has softened some of the optimism that UK economic momentum had gathered since the start of the year," said Jameel Ahmad, chief market analyst at FXTM. "With the UK election looming, I do not personally think sterling/dollar has bottomed out."
Options market pricing showed a jump in the cost of hedging against volatility around the May 7 election date and the weeks after, with the two-month sterling/dollar implied volatility rising to 10.85 percent, the highest since late 2011. Opinion polls show the ruling Conservatives and the opposition Labour neck-and-neck, making a hung parliament a strong likelihood and spelling a lengthy period of uncertainty.
"It is also not clear which alternative political outcome is better for sterling, given uncertainty around the possibility of an EU referendum in the event of a Conservative government and Labour's poor fiscal record the last time they were in office," said Roger Hallam, Chief Investment Officer for Global Currencies, J.P. Morgan Asset Management.
The Conservatives, under pressure from the anti-EU UK Independence Party, have promised a referendum on EU membership within two years if they win. Despite all the election uncertainty, investors are still expecting the BoE to raise rates early next year, helping the pound stay strong against the euro, traders said.