FX Focus: Pound falls flat amid growing political jitters

Political jitters made their presence felt in the forex market on Friday (2 June), with the pound largely flat amid thin trading volumes.

Midway through the afternoon, sterling was trading at $1.2877 and €1.1478, failing to be inspired by a positive report on the construction industry, which showed the sector grew at the fastest pace in 17 months.

Upbeat economic data was offset by a plethora of opinion polls, which showed different levels of gaps between the ruling Conservative Party and the opposing Labour Party, less than a week before the 8 June General Election.

The latest polling update from YouGov showed the Theresa May's party was back up to a four-point lead on an unmoved 42% to Labour's 38%, down one percentage points from the previous day. However, an Ipsos Mori poll for the Evening Standard, showed the support for the Tories fell from 49% to 45%, while Labour gained from 34% to 40%.

Lukman Otunuga, research analyst at FXTM, said political jitters in the UK and Brexit fears have become bone deep.

"It is becoming clear that Brexit developments may dictate where sterling trades and uncertainty is likely to limit any concrete upside gains," he explained.

"With recent polls suggesting a potential situation where Theresa May fails to secure enough seats to form a government, investors have become jittery of a 'hung parliament' scenario playing out. From a technical standpoint, the pound/dollar rate bears need to secure a daily close below $1.2775 to encourage a further depreciation towards $1.2600."

Elsewhere, the dollar tumbled after the US non-farm payrolls report showed the US economy added considerably less jobs than expected.

Flat against the Canadian dollar, the greenback was 0.76% and 0.55% lower against the yen and the euro respectively, trading at ¥110.52 and 0.8868 euro cents. The greenback also dropped 0.74% and 0.57% against the Swiss Franc and the Australian dollar respectively, trading at CHF0.9641 and AUD$1.3475.

The world's largest economy added 138,000 jobs last month, below the 180,000 figure analysts had expected and down from the 174,000 recorded in April, which was itself revised down from 211,000.

The figure for March was also revised down, falling from 79,000 to 50,000.

However, despite the worse-than-expected figure, analysts still expect the Federal Reserve to hike interest rates this month.

"A June rate hike is pretty well nailed on and today's relatively soft non-farm payrolls number shouldn't really affect the FOMC's decision-making in the near-term," said Neil Wilson, senior analyst at ETX Capital.

"We know the Fed is more than happy to look through this kind of thing. The big question is not really whether we get a hike in June now but the extent to which the market thinks the Fed is ready to do one or even two more hikes this year."

Darren Ruane, head of fixed interest at Investec Wealth & Investment, added: "Despite the disappointing economic news, the big picture remains that the unemployment rate is close to normal cycle lows and the likelihood of a US interest rate rise later this month has not diminished.

"Fed policymakers will likely focus on the second round effects of a tight labour market and may ignore today's data as short-term economic noise."