Sterling rose against a weaker dollar on Monday as markets looked beyond the upcoming British general election and instead turned their attention to the outlook for monetary policy.
The pound was last up almost 0.2% against the dollar, at $1.2664, after falling to $1.2622 on Friday, its lowest level since May 15.
Britain heads to the polls on July 4, but with polls holding steady and the opposition Labor Party likely to win a majority, markets show little concern about the outcome.
“Given the stability of the polls, a Labor victory seems a foregone conclusion,” said Simon Harvey, head of currency analysis at Monex.
“There is not much room for fiscal maneuver whoever wins, so the British election is not a major event for markets.”
Instead, much of the focus remains on the outlook for monetary policy.
The Bank of England last week held its main interest rate steady at 5.25%, its highest level in 16 years, but the prospect of a future rate cut grew closer as some policymakers said his thinking was now “finely balanced.”
“We believe the Bank of England took a step in the direction of a rate cut in August last week,” said ING currency strategist Francesco Pesole.
Money markets are implying about a 50% chance of a quarter-point rate cut at the central bank’s August meeting.
“We see the Bank of England joining the global easing cycle, but they are starting from a higher base than others,” Monex’s Harvey said, citing the European Central Bank and the Swiss National Bank, which have already lowered interest rates in this global relaxation cycle.
“We are bullish on sterling, but we prefer to express it in crosses because the dynamics of the dollar pose a lot of uncertainty,” Harvey added.
The U.S. dollar index, which measures the currency against six other currencies, fell 0.3% on Monday but remained near nearly eight-week highs reached last week as the outlook for more patient U.S. rates Federal Reserve continue to diverge from those of their counterparts.
The pound fell around 0.2% to 84.75 pence per euro, its weakest level in two weeks.
