Pound hurt by political doubts

Sterling fell against the dollar and the euro on Monday, weighed down on the first official day of a national election campaign that looks set to give no party an outright majority. With parliament dissolved, Prime Minister David Cameron went to Buckingham Palace and met Queen Elizabeth, a formality marking the end of five years of coalition government between his Conservatives and the Liberal Democrats.
In anticipation of the May 7 election, the outcome of which is the most uncertain in decades, the price of hedging against price swings in sterling's exchange rate over the coming two months was driven to its highest in 3-1/2 years earlier this month.
Britain's continued membership of the European Union hangs on the outcome, as does the future of the increasingly frayed balance of power between the United Kingdom and its most assertive constituent part, Scotland.
Sterling was 0.7 percent lower against the dollar on Monday at $1.4778, and on track for its worst monthly performance in two years. "You're seeing the first signs that some political risk has been priced into sterling," said Daragh Maher, a currency strategist at HSBC, explaining that on an interest rate differential basis, sterling should be trading higher. But he also said sterling tended to track euro/dollar.
"It almost feels like a little brother, tracking euro/dollar round the fairground," he said. "I think we're seeing the same kind of pattern playing out this morning."
Data released on Monday showing UK mortgage approvals reached a six-month high in February, which suggests the housing market could start to regain momentum, appeared to have no impact on the pound.
Against the euro, sterling was 0.1 percent lower at 73.240 pence. That follows two weeks of gains for the single currency that saw it rise almost 5 percent since hitting a seven-year low of 70.145 pence on March 11.
"Today we have seen general dollar strength which could be due to the market preparing for Friday's jobs data and maybe no one wants to chase the further dollar weakness we have seen since the latest FOMC statement we have seen," said Petr Krpata, FX strategist at ING in London.
"The closer to the general election we get, the more sterling will suffer. There is uncertainty about the outcome on the election date but also uncertainty about what happens after in terms of who will be in government and what types of risks they will bring."