Sterling dips on soft data

By Anirban Nag Time of article published Apr 10, 2015

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London - 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 month on month in February, below a forecast for a 0.3 percent rise in a Reuters poll of economists, official data showed. That did not bode well for first quarter economic growth and weighed down on the currency.

Sterling fell to $1.4623 after the data, its lowest level since mid-2010 and down 0.5 percent on the day. It was trading at $1.4685 before the data was released.

The euro was flat against sterling at 72.44 pence .

“Although manufacturing and industrial production have rebounded slightly from last month's disappointing reading, they have still come in below expectations and this will heap more pressure on the pound,” said Dennis de Jong, managing director at UFX.com, an online currency trading firm.

“We've seen in the past few days sterling fall to well below the $1.5000 mark and, with the election on the horizon, the pound could drop further against the greenback.”

Currency investors are growing more edgy as next month's election draws near. Opinion polls show the ruling Conservatives and the main opposition Labour Party neck-and-neck before the May 7 vote, with Scottish Nationalists who want to break up the United Kingdom likely to be the third biggest group in the Westminster parliament.

That makes a hung parliament, in which no party wins overall control, likely and investors fear coalition negotiations will drag on much longer than after the last election in 2010.

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.

Reuters

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