Sterling inched lower against the dollar and euro on Thursday, with forecast-beating manufacturing data giving the currency only a minimal boost as traders eyed radically conflicting polls on next week’s British elections. A May survey of purchasing managers in the manufacturing sector beat forecasts in a Reuters poll of economists, but the pound’s reaction was small, temporarily trimming some losses against the dollar and the euro before again.
Some recent polls have hinted that Prime Minister Theresa May and her Conservative Party could even lose parliamentary elections on June 8, worrying financial markets who hoped a clear victory might provide a smoother exit from the European Union over the next two years.
Other surveys have shown May still on course to substantially increase her majority and bookmakers still put the chances of a Conservative victory at more than 90 percent. “I wouldn’t say the data was particularly strong,” said Alvin Tan, currency strategist with Societe Generale on sterling’s limited reaction to the data,
“It’s worth bearing in mind the bigger issue around sterling in the next couple of weeks is the election, not so much the economy.” By 1012 GMT, the pound was down nearly half a percent at $1.2836. It was 0.4 percent lower at 87.49 pence per euro.
While the pound has see-sawed against the dollar on polls that show the opposition Labour Party catching up, it has largely stayed close to seven-month highs. But against the euro, it has lost nearly 5 percent after its bump following the election announcement. “We continue to think that the market is expecting Theresa May and the Conservatives to win the general election,” wrote Kathleen Brooks, research director at City Index.
“1-month at the money volatility for sterling/dollar has moved a little higher, but is still at the same level as April, while sterling/dollar 1-month risk reversals do not suggest that there are a wave of bearish bets for sterling right now. This explains the 1.2750-1.30 range for sterling/dollar leading up to this election, which hardly suggests panic stations.”
Implied volatility is the cost of hedging against price swings in a currency, while risk reversals are a gauge of the balance in the market between options betting on a currency rising or falling.