Pound near day’s lows on UK election uncertainty

The British pound held near the day’s lows on Monday with investors’ attention focused on political developments as election campaigning gets under way.

The British currency drifted down 0.1 percent against the dollar and euro.

UK PMI data showed that construction shrank for the sixth month in a row in October. The data was in line with expectations and reflected a slowdown in growth due to political uncertainty before UK Prime Minister Boris Johnson‘s now-defunct October 31 Brexit deadline.

The pound was little changed by the data, last trading at $1.2915, holding below the $1.30 benchmark hit nearly two weeks ago. Versus the euro, sterling was down 0.1 percent at 86.39 pence.

“The data is irrelevant compared to the political election campaign we’ve got under way,” said Jordan Rochester, FX strategist at Nomura, who noted that weaker-than-expected Spanish PMI data on Monday weakened the euro, which strengthened the dollar, and thus capped sterling.

With just over five weeks until the United Kingdom heads to the polls on December 12, the Conservative Party is leading in the polls and the risk of a “no-deal” Brexit is considered to have been reduced.

A spokesman for Johnson said that the transition period after the UK leaves the European Union would not be extended beyond December 31, 2020.

The Brexit Party’s leader Nigel Farage said on Sunday that he would not stand in the election, choosing instead to campaign against Johnson’s EU divorce deal.

Sterling-dollar implied volatility gauges with a one-month maturity, which fell in October, have started to rise again.

“It’s too early to say who’s going to win and, given that uncertainty, foreign investors will hold back from being overweight UK assets,” Rochester said, suggesting that polling was not a reliable indicator as around a fifth of British voters would not have decided who to vote for yet.

Reduced shorts

Leveraged funds that bet on the direction of sterling reduced their short positions on the pound in the week to October 29 to $2.606bn, a six-month low, according to CFTC data on Refinitiv.

This means that there was a reduction in the expectation that the pound will fall.

Still, those levels showed that market participants remained negative overall on sterling, leaving the market vulnerable to a squeeze higher in the event of any favourable news.

“The dynamics are reflecting the sharp decline in the perceived odds of a hard Brexit and the subsequent weaker catalysts for a possible GBP decline,” ING FX strategists Francesco Pesole and Petr Krpata wrote in a note to clients.

“The possible changes in polls that would indicate a higher probability of a hung parliament would likely lead to some renewed build-up of sterling shorts,” they said.

“In our view, this indicates that GBP will less and less benefit from that short-squeezing effect that has been exacerbating upside moves in the past weeks.”