LONDON: Sterling inched lower on Friday after anti-EU party UKIP took a second parliamentary seat from Prime Minister David Cameron's Conservatives, a harbinger of growing political risk ahead of next May's general election.
Dealers played down any major impact from the vote in a constituency just south of London, but said concerns about the political outlook were clearly one of the factors behind a continuing downbeat tone on sterling.
The pound is down 1.5 percent this week in trade-weighted terms, its worst performance since the start of 2013.
It was a third of a percent lower against the dollar at $1.5653 and marginally higher against the euro at 79.78 pence, leaving it 0.1 percent weaker against a currency basket. "The result was pretty much as expected. The margin to UKIP was if anything slightly smaller so there isn't that much reaction this morning," said Graham Davidson, a spot currency dealer with National Australia Bank in London.
"But the political situation is a pretty big headwind for sterling and it will only become a bigger issue as we head into the election next year." Cameron's Conservatives are neck and neck in the polls with main opposition party Labour but a slide in support for both means the electoral arithmetic favours a coalition that could hand either UKIP or the Scottish nationalists a key role.
One wants to take Scotland out of the United Kingdom, the other Britain out of the European Union.
George King, portfolio strategist at RBC Wealth Management, told a Reuters investment summit this week that investors should prepare for the possibility next year's polls could lead to a potentially disruptive exit from the EU.
"At the beginning of the year we were cautious on emerging markets because of elections in key markets. Ironically just as the political risk stream in emerging markets begins to ameliorate, we see it beginning to rise in the United Kingdom," he said. "We are not trying to (predict the outcome of the election) all we are saying is that if the risk isn't priced in, we should be aware of that and decide what to do."
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