Sterling set for weekly loss on political uncertainty

Sterling edged lower on Friday and is poised for a weekly loss as investors await political developments ahead of Britain's Dec. 12 election.

The pound briefly dipped below $1.28 against the dollar earlier, ignoring news that Scottish First Minister Nicola Sturgeon would seek to form a "progressive alliance" to keep the Conservatives out in the event of a hung parliament.

Sturgeon said the Scottish National Party would seek to stop Brexit by supporting a second referendum.

The pound fell to an Oct. 26 low of $1.2794 on Thursday when the Bank of England's decision to keep rates constant was not unanimous as had been expected. It recovered subsequently but is still set to lose on the week.

Two out of nine officials voted to cut interest rates this month and others said they would consider a cut if global and Brexit headwinds did not lift. The pound recovered from Thursday's losses, up slightly versus the dollar at $1.2809 but overall down by around 1% since the start of the week.

Versus the euro, the pound strengthened around 0.1% at 86.17 pence.

The Bank of England meeting's surprisingly dovish outcome did not make a lasting impression on the pound, Commerzbank FX strategist Thu Lan Nguyen said.

"It just shows that the market is largely concentrated on politics at the moment, and not on fundamentals and monetary policy," she said.

Labour market data showed that British employers' demand for staff grew in October at the slowest rate in almost eight years.

Nguyen said the weaker labour data fits into a deteriorating economic picture - along with Brexit uncertainty and weak global growth - which could make the BoE more dovish.

"This should at least limit the appreciation potential of the pound over the medium to long term, but still the general direction of pound exchange rate will be determined by the general election," she said.

However, some investors were turning more bullish. Gregory Perdon, co-chief investment officer at Arbuthnot Latham, said that he was more optimistic on UK assets.

"It is true no one knows the Brexit outcome but it does not feel like 50/50 anymore," he said, adding that Arbuthnot Latham had increased pound positions.

"This way, if the UK markets snap back to the upside, we will participate in the rally," Perdon said.

Sterling-dollar implied volatility gauges with one-month durations - expiring just before the election - edged lower, having more than halved since their peak in mid-October.

Implied volatility gauges with three-month maturities, encompassing the Jan. 31 Brexit deadline, were at their lowest levels since late July.

Moody's is due to review Britain's credit rating later in the day. Britain is currently rated Aa2.