Sterling declines amid election uncertainty

Sterling fell for the second consecutive day against the dollar on Friday amid weak manufacturing managers' data for April and uncertainty ahead of next week's general election.

The pound dropped 1.4 per cent against the greenback to $1.5135 - in just two days sterling has halved the 4 per cent gain it made against the dollar in the whole of April.

"Overall election uncertainty has not had a profound negative impact yet but it seems it is starting to have an impact now and probably in the coming days," said Georgette Boele, co-ordinator of FX and Commodity Strategy at ABN Amro.

"We think sterling has much further to go on the downside," she added.

Market measures of sterling volatility against the euro and the dollar both jumped this week.

The pound-dollar one month at the money option volatility jumped 9.6 per cent on Friday. In April, it rose to levels not seen since 2011 and has remained high since.

Meanwhile, the dollar on Friday broke its longest losing streak against the euro since 2013 (of six consecutive days) as the single currency edged 0.3 per cent lower to $1.1186.

Dollar bulls suffered more pain over the week as lacklustre US GDP figures for the first quarter damped expectations of a Federal Reserve rate hike while improving economic data from the eurozone sent the common currency sharply higher against the dollar.

Despite Friday's dip, the euro has gained 6.2 per cent against the greenback since it hit a low of $1.05 on April 13.

As the European Central Bank continues its massive asset purchase programme, analysts expect the euro's gains against the dollar to go into reverse.

"We think the euro-dollar has hit a short term peak ... Draghi will raise the rhetoric on more easing if the currency becomes too strong for comfort," said Geoffrey Yu, senior currency strategist at UBS.

Miss Boele said: "The ECB has far more to do on the monetary policy buying front and at the same time we expect a recovery in the US economy, so you'll have the two things working together and we expect the euro-dollar to go much lower, even to below parity this year."

Fears about the Greek debt crisis eased as Greek Prime Minister Alexis Tsipras reshuffled his bailout negotiation team, which also boosted the single currency.

As the euro appreciated, yields on eurozone government bonds also jumped this week, raising fears that the impact of the ECB's QE programme could be waning.

"I think it's likely we'll get some dovish commentary from the ECB to fend off the moves in the Bund yields we've seen this week," said Jane Foley, senior FX strategist at Rabobank.

Meanwhile, the weakening dollar heightened fears for emerging markets, which become less competitive as their currencies appreciate against the US dollar.

The JPMorgan Emerging Markets Currency index gained 2.2 per cent in April and the Polish zloty jumped 2.3 per cent this week.

The sharp currency swings that ensued as the US dollar bull run went into reverse raised the prospect of further loosening of monetary policy from central banks around the globe.

"If the dollar weakness is showing signs of continuing, it's very likely we'll see signs of aggressive easing in Japan, Australia, New Zealand, Thailand and Korea," said Ms Foley.

"This could trigger the next instalment of the currency wars," she added.

© 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