Pound drops to 5-year low after output data, amid election risk

[LONDON] The pound fell to an almost five-year low against the dollar as a report showed UK industrial production rose less than economists forecast.

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

The pound declined 0.6 per cent to US$1.4622 at 12:03 pm London time, and touched US$1.4617, the lowest level since June 2010. Sterling has dropped 2 per cent versus the dollar this week. It was little changed on Friday at 72.39 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." Mr Jones said he expects sterling to fall toward US$1.40.

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

The currency has been declining before the UK'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 US 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 Mr Savouri. "Sterling will come under pressure, most markedly against the dollar." The pound could drop by as much as 15 per cent against the dollar amid the uncertainty, valuing it at around US$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.

UK government bonds declined, with the 10-year gilt yield rising three basis points, or 0.03 percentage point, to 1.60 per cent. The 5 per cent bond due in March 2025 fell 0.325, or 3.25 pounds per 1,000-pound face amount, to 131.02.

BLOOMBERG