Pound’s Election Honeymoon Over as Focus Shifts to EU Referendum

Investors’ initial relief that the U.K. elected a majority government, which helped propel the pound to its highest level in five months against the dollar, is over.

Victorious Prime Minister David Cameron is now touring neighboring states in search of allies for his proposed changes to Britain’s relationship with the European Union. As the looming referendum on whether the nation will choose to leave the world’s biggest single market has shot to the top of the political agenda, sterling forfeited almost all of its post election rally versus the dollar. This week it came off its 2 1/2 month high against the euro.

“I don’t have concerns for sterling from a data front,” said Steve Barrow, head of Group-of-10 strategy at Standard Bank Group Ltd. “Where there could be more concerns is from the EU referendum. The downtrend is reasonably entrenched as far as sterling-dollar is concerned.”

The pound fell for a sixth day against the dollar on Friday, its worst run by length since last October. It was down 1.5 percent on the week to $1.5268 at 5:15 p.m. London time before which it had touched $1.5237, its lowest since May 7, election day. Sterling weakened 1.2 percent to 71.98 pence per euro in the five-day period.

Volatility Rises

One-week volatility on the pound against the dollar rose for the first week since the five days through May 1. That was close to when it jumped to the highest since 2010, amid concern the election would produce no clear winner.

Barrow said Cameron’s pledge of an EU referendum was needed to ward off the threat of a rival party during the elections, but now he faces a new challenge of securing buy-ins from his EU counterparts on his proposals.

“It is going to be a difficult process for the Conservatives. In some sense it is like waking up after the party and then realizing you did something beforehand that you regret afterwards,” Barrow said.

Reports next week may show slowdowns in both services growth and house-price increases, according to separate surveys of economists.

The yield on benchmark 10-year government bonds fell 12 basis points, or 0.12 percentage point, to 1.81 percent in the week. The 5 percent gilt due in March 2025 rose 1.135, or 11.35 pounds per 1,000-pound face amount, to 128.4.