| 08 November, 2019

Sterling holds above $1.28, unchanged as investors wait for political moves

The pound recovered from Thursday's losses, up slightly versus the dollar at $1.2819 but overall down by around 1% since the start of the week

British pound,along with dollars and Euros.

British pound,along with dollars and Euros.

Getty Images/Matt Cardy

LONDON - Sterling was little changed on Friday, holding just above $1.28 and recovering from two-week lows against the dollar and euro, as investors await political developments ahead of Britain's Dec. 12 election.

The pound was pushed to a low of $1.2794 on Thursday when the Bank of England's decision to keep rates constant was not unanimous as had been expected. 

Two out of nine officials voted to cut interest rates this month and others said they would consider a cut if global and Brexit headwinds did not lift. 

The pound recovered from Thursday's losses, up slightly versus the dollar at $1.2819 but overall down by around 1% since the start of the week.

Versus the euro, the pound strengthened around 0.1% at 86.18 pence.

The Bank of England meeting's surprisingly dovish outcome did not make a lasting impression on the pound, Commerzbank FX strategist Thu Lan Nguyen said.

"It just shows that the market is largely concentrated on politics at the moment, and not on fundamentals and monetary policy," she said.

Labour market data showed that British employers' demand for staff grew in October at the slowest rate in almost eight years.

Nguyen said that the weaker labour data fits into a deteriorating economic picture - along with Brexit uncertainty and weak global growth - which could make the BoE more dovish.

"This should at least limit the appreciation potential of the pound over the medium to long term, but still the general direction of pound exchange rate will be determined by the general election," she said.

MUFG European head of global markets Derek Halpenny wrote in a note that he saw downside risks for the pound in the short-term.

"On the political front, it would only take some gains for the Labour Party in the polls to unnerve the markets over the risk of the upcoming general election failing to resolve the Brexit gridlock," he wrote.

"The risks associated with that don't appear priced at present," Halpenny said.

"An election result that returns a very unstable government would also undermine prospects of any considerable fiscal easing," he added.

Sterling-dollar implied volatility gauges with one-month durations - expiring just before the Dec. 13 election - were down slightly, having more than halved since their peak in mid-October.

Moody's is due to review Britain's credit rating later in the day. Britain is currently rated Aa2.

(Reporting by Elizabeth Howcroft; Editing by Alison Williams) ((Elizabeth.howcroft@thomsonreuters.com))

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