Sterling Edges up but Political Risks Limit Gains

Sterling hit a nine-day high of $1.3979 in Asian trading after the U.S. Federal Reserve said it was too early to consider rolling back its emergency support - pushing the dollar to nine-week lows.

But the pound soon lost these gains during the European session.

At 1439 GMT, it was at $1.3956, up 0.1% on the day and up just 0.5% on the week so far. Versus the euro, it was up 0.2% at 86.77 pence per euro, stuck in the narrow range it has traded in for most of April.

Investors are watching political developments in Britain, as Prime Minister Boris Johnson is under pressure from a series of accusations about how he responded to the COVID-19 pandemic and who paid for the refurbishment of his flat, as well as an inquiry into leaks of private information from his office.

“Although also benefiting from the softer USD environment and GBP/USD is very close to the 1.4000 level, political woes are limiting the GBP upside,” ING strategist Petr Krpata wrote in a note to clients, citing the Electoral Commission’s investigation.

“Coupled with the upcoming Scottish elections, all this points to limited near-term upside to GBP,” he added.

Britain holds regional and local elections on May 6, including a vote in Scotland expected to produce a pro-independence majority there. Scotland voted narrowly to remain the United Kingdom in 2014, and most analysts consider another referendum on independence to be unlikely.

“Markets have started to reflect the potential risk of Scottish independence following the election,” said Kallum Pickering, senior economist at Berenberg.

“A further modest drop in sterling could follow a majority result for Scottish nationalists. However, while Scottish independence remains a risk to take seriously, the chance that Scotland actually leaves the UK, even in the event of a majority for nationalists on 6 May, remains low.”

But Michael Hewson, chief market analyst at CMC Markets said that people were over-estimating the significance of political risk around Johnson or the Scottish elections and that these narratives were gaining traction because of a lack of other drivers to explain the pound’s relative stasis.

“I’m still fairly bullish on it. I think that we’re likely to get a fairly decent economic rebound over the course of the next few months… I still think that Europe is going to lag behind, when it comes to the recovery.”