The pound sprang higher on Monday, after the Brexit party said it would not contest Conservative seats in the upcoming election, but analysts said the lingering chance of a hung parliament and indecision over the terms of divorce from the EU would limit the currency’s rally.
Sterling jumped 0.8 per cent against the dollar to almost $1.29 after Brexit party leader Nigel Farage announced his strategy, with a similar gain against the euro to €1.1684. Jordan Rochester, a currency strategist at Nomura in London, said the “limited” reaction to Mr Farage’s announcement reflected a wariness among investors to anticipate any particular election outcome with weeks to go, especially as polls look “spookily like 2017.”
“A lack of a sustained rally in sterling further emboldens the view that folks are unwilling to buy into the end game trades this early on in a campaign,” Mr Rochester said.
The pound briefly touched $1.30 after the EU granted an extension to the UK’s mooted October 31 departure deadline, but the currency was unable to gain a foothold at those levels, and has hovered above $1.28 since the start of November.
Seema Shah, chief strategist at Principal Global Investors said price swings could pick up again ahead of the date of December 12. Ms Shah noted that with markets largely winding down towards the end of the year, “sterling is now at the whim of headline risk”.
“Investors should anticipate conflicting headlines, with currency moves perhaps disproportionate to the overall impact,” she said.
As the election campaign hots up, both Labour and Conservative parties have promised to increase public spending. Meanwhile, rating agency Moody’s has raised an alarm over the UK’s debt, noting that “paralysis” stemming from Brexit has made policymaking less predictable. Data earlier on Monday also demonstrated a slow pace of economic growth.
But for now, economics are playing a minor role for the currency compared to the Brexit negotiations, with a no-deal exit widely seen as a large risk to the value of the currency.
“The clearest way to avoid no deal is for the Tories to get in,” said Paul Dales, chief UK economist at Capital Economics.
Mr Dales said financial markets had to cope with either a “hardish” Brexit under a Conservative government with business friendly policies, or a softer Brexit under a Labour government that could implement policies to squeeze businesses. “Both outcomes would prevent a huge surge in the pound,” he added.
