Pound Drops to 5-Year Low After Output Data, Amid Election Risk

The pound fell to an almost five-year low against the dollar as U.K. industrial production rose less than economists forecast, damping demand for Britain’s currency.

Sterling posted its biggest weekly decline in a month versus the U.S. currency after the Office for National Statistics said output increased 0.1 percent in February, below the 0.3 percent prediction in a Bloomberg survey of analysts. The Bank of England kept interest rates at a record-low 0.5 percent for a 73rd month on Thursday, while traders braced themselves for May elections that look set to produce no clear winner.

The pound declined 0.5 percent to $1.4645 at 4:13 p.m. London time, and touched $1.4587, the lowest level since June 2010. Sterling dropped 1.9 percent versus the dollar this week. It was little changed on Friday at 72.46 pence per euro.

“We’re seeing sterling lower against the dollar and it’s not over yet,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “It will be low until the May elections and then we’ll probably see quite a strong squeeze higher.”

Jones said he expects sterling to fall toward $1.40.

Britain’s currency has weakened 3 percent in the past month against a basket of peers tracked by Bloomberg Correlation-Weighted Indexes, the biggest drop in the group.

Opinion Polls

The currency has been declining before the U.K.’s most uncertain election in a generation, that risks pushing parties into protracted negotiations to form a government. Polls have put the Conservatives and Labour neck-and-neck in recent weeks. Three on Thursday had Labour ahead, in one case by as much as six percentage points. ComRes and YouGov polls placed the Tories ahead by one percentage point.

The pound may drop to a 30-year low against the U.S. dollar as parties jostle for power in the absence of a clear winner, according to Savvas Savouri, chief economist at Toscafund Asset Management.

“Negotiations could drag on for three or four weeks, which markets won’t like,” said Savouri. “Sterling will come under pressure, most markedly against the dollar.”

The pound could drop by as much as 15 percent against the dollar amid the uncertainty, valuing it at around $1.25, according to Savouri. It last reached that level in 1985.

BOE officials are in purdah until the May 7 general election. Their comments before the quiet period suggested there’s a split in the Monetary Policy Committee on the outlook for inflation. Investors are all but ruling out a rate increase before the middle of next year, Sonia forward contracts show.

U.K. 10-year government bonds fell for the first time in four days, with the yield rising two basis points, or 0.02 percentage point, to 1.59 percent. The 5 percent bond due in March 2025 dropped 0.24, or 2.40 pounds per 1,000-pound face amount, to 131.105.

Before it's here, it's on the Bloomberg Terminal.