UK general election uncertainty holds back sterling

Election uncertainty has spooked currency investors and forced sterling to retreat, making a mockery of the pound's once exalted position against the dollar last summer.

Sterling has been on the slide against the greenback as the election outcome bears down on market sentiment, increasing volatility and prompting investors to buy insurance against big swings in the pound.

"The markets are preparing for an uncertain outcome, and that remains the main factor holding back the pound," said Alan Wilde, head of fixed income and currency at Barings.

In July last year, a pound was worth more than $1.70. Despite a strong rally this week, it was trading at $1.49 - a fall of more than 4 per cent since the start of the year.

Although some of that decline is attributed to the strengthening US economy, the forex market is becoming increasingly fixated on what government will emerge from the May 7 poll.

Investors and currency analysts liked to talk up the pound as a relatively safe haven in a sea of weak currencies, thanks to the performance of the UK economy. The eurozone is the UK's main trading partner and sterling continued to perform well against the euro.

However in the forex market, long-term views about the UK economy are being superseded by opinion polls, the likely shape of the House of Commons and what that means for the country's fiscal policy.

Currency strategists are fixated on the possible impact of the election on sterling, and broadly reaching the same conclusion: none of the scenarios are terribly palatable.

They worry that a Labour-led government will lead to looser fiscal policy. A Conservative-led administration may look like one most favoured by the City, but it brings the prospect of up to two years of destabilisation from a referendum on EU membership and potentially Britain's exit.

"If you have a minority government propped up by one of the smaller parties, that could keep uncertainty around for a long period of time," said Ian Stannard, currency analyst at Morgan Stanley.

An outcome that leads to continued instability, and the need for another election, is "the worst-case scenario".

A lot depends on how the election is perceived abroad, Mr Stannard said. "What's weighing on sterling is a slowdown in investment inflows and much of that slowdown is due to uncertainty about the policy outlook," he said.

The best outcome in a series of tough choices would be the status quo, Mr Wilde said. "But I don't think the market can see a market-friendly outcome," he said.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation