FX Focus: Pound gains ground as euro falls amid increasing fears of political instability

The pound gained ground against its major rivals on Tuesday (29 November), while the euro suffered losses amid increasing uncertainty over the Eurozone's political environment.

Sterling had begun the week on the back foot but quickly reversed the losses on Tuesday and, by early afternoon, it was trading 0.46% and 0.74% against the dollar and the euro, exchanging hands at $1.2479 and €1.1780 respectively.

However, analysts warned that, regardless of the recent gains, the outlook for the British currency remained far from promising.

"Sterling remains trapped by the messy Brexit scenario with uncertainty sabotaging any upside gains," said FXTM research analyst Lukman Otunuga.

"The ongoing battle of words between financial heavyweights on the Brexit topic coupled with the many unanswered questions on the government's game plan for Brexit have soured investor attraction towards sterling."

Conversely, however, the pound received a boost earlier in the day, after official figures showed lending to Britons rose at the fastest pace since October 2005. According to BoE data, consumer credit rose by £1.62bn ($2bn) in October, compared with a £1.48bn increase recorded in September, taking the annual rate of growth to 10.5% and offering another indication consumer demand remained solid after Britain voted in favour of leaving the European Union in June.

Elsewhere, the euro posted losses against the dollar, falling 0.33% to $1.0579, with investors growing increasingly apprehensive over the Eurozone's future, just days before Italy goes to the polls to vote on a constitutional referendum. Analysts have warned that a win for the 'No' campaign could see Prime Minister Matteo Renzi stepping down, which could in turn generate more political instability in an already volatile environment.

Kathleen Brooks, research director at City Index highlighted the lack of updated about the intention of voters – Italian law forbids the publication of polls after a certain date – would only heighten uncertainty in the markets. "Since Italy has not allowed polling since 18 November, the markets are going into this election blind," she said. "This is likely to increase the tension and nervousness around this referendum, and could keep market volatility high for the rest of this week."

Analysts at Societe Generale, however, indicated they did not expect the euro to weaken enough to reach parity with the US dollar, as opposed to what a number of economists have suggested over the couple of weeks.

Meanwhile, the greenback put the previous session's losses behind as it rallied against the world's main currencies, with the exception of the pound. The dollar surged 1.20% against the yen, trading at ¥113.28, and gained 0.45% and 0.25% against its Canadian and Australian counterparts, fetching CAD$1.3472 and AUD$1.3377 respectively.