Pound flat as traders try to read election tea leaves

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
Boris Johnson speaks at the Conservative party's general election campaign launch, at the National Exhibition Centre in Birmingham, England, on 6 November. Photo: Adrian Dennis/AFP via Getty Images

The pound was flat against the euro and dollar on Thursday as investors await signs of how next month’s general election could play out.

Sterling was flat against the euro at €1.1665 (GBPEUR=X) and flat against the dollar at $1.284 (GBPUSD=X). Both pairings have been trading in a narrow range for most of the week.

The pound failed to move much on disappointing retail sales numbers released at 9.30am UK time. Economists had forecast retail sales growth of 0.2% in October but sales in fact shrank by 0.3% compared with the prior month.

Politics remains the most important factor driving investor sentiment around sterling and all eyes are on the upcoming general election on 12 December.

“For the pound, the political process toward resolving Brexit is more important to monitor than Bank of England decisions stemming from the state of the UK economy,” Gaétan Peroux, a strategist at UBS wealth management, said in a note sent to clients last week.

There continued to be a flurry of election headlines on Thursday — including the Conservative party promising to cut overall levels of immigration and Lib Dem leader Jo Swinson pledging not to help Labour’s Jeremy Corbyn — but none were viewed as decisive by traders.

Chris Turner, ING’s head of foreign exchange (FX) strategy, said the pound was “quiet now that speculative positioning is back to more normal levels.”

David Cheetham, chief market analyst at trading platform XTB, said he has seen “a big increase in GBP pairs during the strong rally in October but it has since subsided a bit, mainly due to the uncertainty surrounding the upcoming election.”

Turner said: “Tuesday’s brief rally on the Farage news shows that the market really lack conviction ahead of the election. Instead we just expect a little volatility in recent ranges, depending on how the polls run.”

Markets are pricing in a Conservative majority in parliament as the most likely outcome of the election, according to Turner’s team. Signs that the Tories could fall short would provide downward price pressure for the pound against the dollar and euro, as a hung parliament or Labour government are likely to extend Brexit uncertainty.

Cheetham said XTB had seen a recent increase in clients taking short positions against the pound.

“More people are looking for a pullback ahead of the ballot,” he said.