Sterling flat as election optimism offset by post-Brexit pessimism

Sterling was down slightly against a stronger dollar but little changed against the euro on Friday, as investors' hopes for a Conservative majority in the Dec. 12 election were tempered by concerns about the broader economic outlook.

The pound has been rising in the past week as polls suggest Prime Minister Boris Johnson's Conservative party could win a majority, which is seen as increasing the chances of the UK leaving the European Union with a deal on Jan. 31. "Sterling had that venture higher to $1.30 in late October and has eased since then," said Neil Mellor, senior currency strategist at BNY Mellon, referring to sterling's rally in the run-up to a withdrawal deal being agreed at an EU summit.

However, positive election news may be distracting from broader market pessimism about sterling's long-term outlook, because the UK will only have 11 months to negotiate a trade deal with the EU next year before a transition period comes to an end. "My concern is - and this is something possibly the market has thought about - that we've got preoccupied with the election but there is still a lot of uncertainty post-election," Mellor said.

Sterling was down around 0.1% at $1.2874, but on track for modest weekly gains, up around 1% since last Friday. Versus the euro, the pound was little changed at 85.62 pence, having strengthened to fresh six-month highs in a rally which puzzled analysts in late London trading on Thursday.

A YouGov poll on Thursday showed that 86% of Britons who will vote in the election thought of themselves as "Leavers" or "Remainers", versus just 68% who identified themselves as a political party. Johnson repeated his intention to "get Brexit done" on Friday, saying the UK needs to come out of regulatory alignment with the EU and that it has "bags of time" to negotiate a free trade deal.

Britain's opposition Labour Party said it would nationalize parts of telecoms provider BT's network if it won power in the Dec. 12 election to provide free full-fiber broadband for all. The proposal sent shares in BT down to the bottom of London's blue-chip FTSE 100 index.

"At present sterling benefits from anything that lowers Labour's chances of winning the election," Commerzbank's head of FX and commodity research Ulrich Leuchtmann wrote in a note to clients.

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