Sterling rangebound on election uncertainty; BoE eyed

City workers walk past the Bank of England in London in this picture released June 26, 2016. — Reuters pic
City workers walk past the Bank of England in London in this picture released June 26, 2016. — Reuters pic

LONDON, Nov 5 — The British pound drifted higher today but stayed within recent trading ranges after survey data showed Britain’s services sector stagnated last month due to concerns about Brexit.

With the Bank of England set to hold interest rates unchanged at a policy meeting on Thursday and a national election less than six weeks away, investors will be watching closely any changes in opinion poll trends for the major political parties before adding positions on the pound.

“Unless you see a strong evidence of a Conservative Party win, it will be difficult for the pound to sustain (a position) above the US$1.30 (RM5.37) levels,” said Fritz Louw, an FX strategist at MUFG based in London.

While the BoE is almost certain to hold rates at 0.75 per cent, weak economic data makes it increasingly likely that its next move will be a cut rather than a hike.

The central bank must also contend with prospects of the Dec 12 election yielding another hung parliament, which could drag the Brexit debate beyond Jan 31, the third deadline for Britain to leave the European Union

While the risk of a “no-deal” Brexit is considered to have been reduced, the main parties are at odds over how the divorce agreement should look.

A Yougov poll showed the ruling Conservatives with a 13 percentage-point lead over opposition Labour, while support for the Brexit Party has bounced 4 percentage points since November 1. [

Aside from Brexit and election newsflow, the Bank of England will be watching the economic data with some concern after construction PMI activity was reported on Monday to have shrunk for the sixth month in a row. On Tuesday, figures showed a 7 per cent drop in new car sales.

IHS Markit’s services PMI edged up to 50.0 — which represents zero growth — from 49.5 in September, one of the lowest readings since 2009. The all-sector PMI stayed below 50 for a third straight month, the first time this has happened since 2009.

Against the dollar, the pound rose 0.2 per cent at US$1.2901, coming off an earlier session high of US$1.2904. Versus the euro , the pound edged 0.1 per cent up to 86.25 pence.

BNP Paribas economists said the BoE meeting would be a neutral event for the pound.

“We maintain a structurally bullish stance on the currency, although with uncertainty surrounding the outcome of the general election, we are patient,” they told clients.

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

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