Pound falls to five-year low as volatility jumps before election

[LONDON] The pound slipped to an almost five-year low against the dollar as the UK election campaign entered its final month, with investors bracing for a contest that's set to be the tightest in a generation.

Sterling posted its worst weekly performance in a month versus the US currency and volatility surged to a five-year high as polls showed the May 7 vote is unlikely to produce a clear winner. The pound also dropped as the Bank of England voted to keep interest rates at a record-low 0.5 per cent for a 73rd month. UK government bonds were little changed.

"One of the things we have been flagging is that the options market for quite some time has been pricing in a lot of uncertainty around the upcoming election," said Michael Sneyd, a foreign-exchange strategist at BNP Paribas SA in London. "It still looks like there is plenty of scope for investors to sell sterling ahead of the election."

The pound fell 1.8 per cent this week to US$1.4648 at 5 pm London time on Friday, when it touched US$1.4587, the lowest since June 2010. The UK currency strengthened 1.6 per cent to 72.35 pence per euro.

Sterling is falling as opinion polls put the Conservatives and Labour neck-and-neck, reinforcing the likelihood of protracted negotiations to form a government. Three polls on Thursday had Labour leading, in one case by as much as six percentage points, while two placed the Tories ahead by one percentage point.

Sterling may fall toward US$1.43, BNP's Sneyd said. A measure of anticipated price swings in the pound against the dollar in a month's time climbed about 2 percentage points this week to 12.78 per cent and touched 13.64 per cent, the highest since June 2010, according to data compiled by Bloomberg. That's up from 6.9 per cent at the end of last year.

Comments from BOE officials before the quiet period until elections suggested there's a split in the Monetary Policy Committee on the outlook for inflation. A report next week will show the annual rate of consumer-price growth stayed at zero for a second month in March, according to the median estimate of economists in a Bloomberg News survey. Investors are all but ruling out an interest rate increase before the middle of next year, Sonia forward contracts show.

U.K. 10-year gilts yielded 1.58 per cent. The price of the 5 per cent gilt due in March 2025 was 131.23 per cent of face value.

BLOOMBERG