LONDON: Sterling edged higher on Friday and is poised to end the week on a stronger note, unmoved by Nigel Farage's announcement that his Brexit Party would fight the ruling Conservatives for every seat if Britain's prime minister does not abandon his Brexit deal.
Farage said Boris Johnson had until Nov. 14 to agree to his demand.
The pound edged 0.1% higher at $1.2946 thanks to a broad weakness in the greenback and is poised to register a tiny 0.9% gain for the week. Against the euro, sterling was a shade weaker at 86.25 pence.
Investors fear a full field of Brexit Party candidates could win over pro-Brexit voters from the ruling Conservatives and thereby boost the leftist Labour Party, analysts said.
Farage has dismissed reports that his party will pull candidates to avoid damaging the Conservatives as "idle speculation".
The currency was unmoved by the release of the Purchasing Managers' Index (PMI) which rose to 49.6 from 48.3 in September, its highest level since April and topping all forecasts in a Reuters poll of economists. However, this was attributed to a stockpiling rush before the aborted Oct. 31 Brexit deadline.
UK gilt futures however dropped around 10 ticks after the PMI, which still lies below the 50 dividing line between growth and contraction.
Johnson called the Dec. 12 election after his Brexit deal with the European Union was held up by parliament, despite his "do or die" vow to take the country out of the EU by Oct. 31.
He said the election would break what he cast as political paralysis thwarting Britain's departure and undermining confidence in the economy.
Many reckon however that the chances are high of a hung parliament, so the election campaign of the Brexit Party could be crucial to the outcome.
"Downside risks for sterling result mainly from a strong election result for Nigel Farage's Brexit Party, which from the point of view of most market participants would increase the risk of a no-deal Brexit," Commerzbank's Thu Lan Nguyen wrote in a note to clients.
October was the pound's best month in over a decade as the currency rallied in the build-up to the mid-month European Union summit at which a new Brexit deal was agreed.
Some of these gains were lost when Johnson subsequently failed to secure his deal's ratification in parliament. But the EU decision to extend the Brexit deadline to Jan. 31 scrapped the risk of a no-deal exit on Oct. 31, allowing the currency to hang on to most of its gains.
The spread between sterling-dollar volatility options expiring in one and two months has grown from flat to 2.5 vols since last week - a big, fast increase, which highlights the perceived volatility threat to sterling after the Dec. 12 UK election.