(Mar 13): The pound declined to the lowest level since 2010 against the dollar as a rally in the greenback was compounded by concerns over the U.K.’s political future.
The dollar gained versus all its major peers on Friday amid speculation the Federal Reserve is moving closer to raising interest rates and as the European Central Bank begins its bond- buying plan. Declines in sterling may have rekindled anxiety over the outcome in May’s U.K. election, which currently seems too close to call, according to Jane Foley, a senior currency strategist at Rabobank International in London.
There’s also speculation that the Bank of England may be slower to raise borrowing costs than previously thought. The pound declined from the 2007 high it reached against the euro earlier this week after BOE Governor Mark Carney said that one factor affecting the pace and degree of interest-rate increases was the evolution of the exchange rate.
“Dollar strength has come back with a vengeance,” Rabobank’s Foley said. “There’s a huge amount of political uncertainty and it’s possible that once sterling began to fall it could have uncovered some of the market’s nerves. We also had Carney moaning about the strength of the currency.”
The pound dropped 1 percent to $1.4736 at 2:59 p.m. in London and touched $1.4710, the weakest since June 2010. Sterling was little changed at 71.37 pence per euro, after touching 70.14 pence per euro on March 11, its strongest level since November 2007. The 19-nation shared currency slid 1.1 percent to $1.0516.
The U.K. election on May 7 looks set to be the tightest since the 1970s. Polls show the Tories and Labour are both on course to fall short of a parliamentary majority. That means either one would need a coalition partner to govern, increasing the potential for policy surprises.
Investors are currently fully pricing a 25 basis-point increase in U.K. borrowing costs by May 2016, compared with February as recently as last week, according to MPC-dated forward Sonia fixings data provided by ICAP Plc. That assumes the current five basis-point spread for Sonia fixings below the Bank Rate would return to zero once the BOE raises rates.