The pound gained ground against a broadly softer dollar on Monday as markets looked beyond Britain’s upcoming general election and focused instead on the outlook for monetary policy.
Sterling rose almost 0.2% against the dollar to $1.2664, after falling to $1.2622 on Friday, its lowest level since May 15.
Britain goes to the polling booth on July 4, but with polls holding firm and indicating the opposition Labor Party is likely to gain a majority, markets are showing little concern about the outcome.
“Given the stability of the polls, a Labor victory seems a foregone conclusion,” said Simon Harvey, head of FX analysis at Monex.
“There is not much room for fiscal maneuvering, whoever wins, so the UK election is not a major event for the market.”
Attention instead remains focused on the prospects for monetary policy.
The Bank of England last week kept its main interest rate steady at 5.25%, a 16-year high, but the prospect of a future rate cut moved closer as some policymakers said that their thinking is now “finely balanced”.
“We believe the Bank of England took a step towards an August rate cut last week,” said Francesco Pesole, strategist at ING FX.
Money markets imply about a 50% chance of a quarter-point rate cut at the Central Bank’s August meeting.
“We see the Bank of England joining the global easing cycle, but starting from a higher base than others,” Monex’s Harvey said, citing the European Central Bank and Swiss National Bank, which have both already lowered rates of interest in this global easing cycle.
“We are bullish on the pound, but we prefer to express it in crosses only because the dynamics of the dollar pose a lot of uncertainty,” Harvey added.
The U.S. dollar index, which measures the currency against six others, fell 0.3% on Monday but remained near nearly eight-week highs reached last week as the outlook for more patient rates from the Federal Reserve continue to diverge from their peers.
The pound fell about 0.2% to 84.75 pence per euro, its weakest level in two weeks.
