Pound Weakens as Political Risk Overshadows Manufacturing Growth

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With investor concern mounting that next month’s general election will produce no clear winner, not even a resurgence in U.K. manufacturing is offering support to the pound.

Sterling fell versus 12 of its 16 major peers on Wednesday, weakening for the first time in five days against the euro, even after data showed U.K. manufacturing output expanded last month at the fastest pace since July. With 36 days until the May 7 election, polls are still showing the two major parties tied on about 35 percent of the vote apiece, not enough for an overall majority.

“Currencies do not like political uncertainty,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “There is no clear leader and I sense genuine concern from investors regarding certain political configurations.”

The pound depreciated 0.3 percent to 72.61 pence per euro at 4:25 p.m. London time. Sterling gained 0.2 percent to $1.4841, having dropped to $1.4740 earlier, the lowest level since March 20.

A gauge of U.K. manufacturing rose to 54.4 last month, matching the median estimate of analysts in a Bloomberg survey. It climbed from a revised 54 in February, according to Markit Economics. A reading above 50 indicates expansion.

Faster Growth

Britain’s gross domestic product expanded 0.6 percent in the final three months of 2014, more than the 0.5 percent previously estimated and an eighth consecutive quarterly gain, the Office for National Statistics said on Tuesday.

U.K. government bonds rose before markets close on Friday and Monday for the Easter holiday weekend, and before a jobs report later this week that analysts predicted will show the American economy continues to strengthen. The 10-year gilt yield fell three basis points, or 0.03 percentage point, to 1.54 percent.

“Risk positions will remain light going into the Easter weekend and ahead of Friday’s nonfarm payrolls,” said Vatsala Datta, a U.K. rates strategist at Royal Bank of Canada in London.

BlackRock Inc. is reducing its short position on gilts before the election, paring bets that the securities’ price will decline.

The U.K. economy is growing and doesn’t face deflation so yields should rise as the Bank of England normalizes monetary policy, said Ian Winship, head of sterling bond portfolios at the world’s biggest money manager, with more than $4 trillion of assets.

“We’re not going to go long or cut the position out,” Winship said by phone. BlackRock may increase the short bets again as the vote gets closer, he said.

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