Sterling drops to five-year low

Sterling fell to a five-year low against the dollar on Friday, hurt by weaker-than-expected industrial data and the rising risk of prolonged political uncertainty after a tight British election next month. Industrial output rose 0.1 percent on the month in February, less than expected, but there were better signs for the economy in forecasts from the NIESR thinktank that showed growth holding steady at 0.6 percent in the first quarter.
The latest polling on Friday showed Scottish nationalists could take nearly all the parliamentary seats in Scotland in the May 7 British election, potentially giving a party that wants to quit the United Kingdom huge influence over the next government.
That, and other polls showing the left-leaning Labour party gaining ground elsewhere, added to nerves for traditionally right-leaning city investors around an election that few expect will quickly generate a stable government. Sterling fell as low as $1.4588 before recovering some ground to trade 0.4 percent lower on the day at $1.4653. Against the euro, it was flat at 72.52 pence.
"I'm surprised there hasn't been more (recent) volatility in the pound to be honest," said Sandra Crowl, a member of the investment committee at French asset manager Carmignac Gestion.
Her concerns, however, focused on the risks to one of Europe's better growth stories represented by the tight fiscal plans of both Labour and the ruling Conservative party, one of which will lead any administration after the election.
"There will be a tight budgetary hold either way and that is not going to be very pro-growth," Crowl said. "It seems timely to be holding UK gilts at this point."
Currency options, which investors use to hedge their exposure to a currency or to speculate on it rising or falling, suggest markets see an elevated chance of more volatility in the pound after the election.
And risk reversals, a gauge of demand for options on a currency rising or falling, show a huge bias for sterling weakness against the dollar in the coming month.
"A $1.40 level for sterling/dollar is certainly not out of reach if the election aftermath turns ugly," said Steve Barrow, currency strategist at Standard Bank.