Sterling held back by election uncertainty; short positions reduced

The pound was flat on Monday, little changed against the dollar but up around 0.1% against the euro, ahead of UK construction data which is expected to take a back seat to political developments as election campaigning gets underway.

PMI data, due at 0930 GMT, will reflect construction during October, when the country faced the risk of a no-deal Brexit in the run-up to the Oct. 31 deadline that has since been postponed. The pound traded flat against the dollar at $1.2935, just over a cent higher than the previous week's open. Versus the euro, sterling was up around 0.1% at 86.23 pence.

"I don't expect it to have a large bounce - the market's having a small bounce if anything," said Jordan Rochester, FX strategist at Nomura. "I don't think it's going to move the pound above $1.30 today," Rochester said, noting that weaker-than-expected Spanish PMI data on Monday weakened the euro, which strengthened the dollar, and thus limited cable.

"The data is irrelevant compared to the political election campaign we've got underway," Rochester said. With just over five weeks until the UK heads to the polls on Dec. 12, the Conservative party is leading in the polls and the risk of a hard Brexit is considered to be reduced.

The Brexit Party's leader Nigel Farage said on Sunday that he would not stand in the election, choosing instead to campaign against Prime Minister Boris Johnson's EU divorce deal. Sterling-dollar implied volatility gauges with a one-month maturity, which fell in October, have started to rise again.

"It's too early to say who's going to win and given that uncertainty, foreign investors will hold back from being overweight UK assets," Nomura's Rochester said, suggesting that polling is not a reliable indicator as around a fifth of UK voters will not have decided who to vote for yet. Leveraged funds that bet on the direction of sterling reduced their short positions on the pound in the week to Oct. 29 to $2.606 billion, a six-month low, according to CFTC data on Refinitiv.

This means that there was a reduction in the expectation that the pound will fall. Still, those levels showed that market participants remained overall negative on sterling, leaving the market vulnerable to a squeeze higher in the event of any favorable news.

The Bank of England's monetary policy committee will meet on Thursday and is expected to hold rates steady, although there is some speculation that it might drop its tightening bias. 

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(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)