Sterling firms after data surprise but election uncertainty curbs gains

LONDON: Sterling hit a day's high against the euro on Tuesday after data showed Britain's dominant services sector grew strongly in March, although analysts and traders said gains were capped by uncertainty ahead of next month's election.

The Markit/CIPS services purchasing managers' index (PMI) surged to hit an eight-month high of 58.9 in March, up from 56.7 in February, pointing to a speeding up of overall economic growth in the first three months of 2015.

The British pound initially rose to 72.89 per euro after the data, then eased to 73.03 pence, still 0.5 percent higher on the day.

Against the dollar, sterling was down 0.1 percent at $1.4866, having risen to $1.4900 immediately after the data was released..

"There is no question that the risks surrounding the upcoming election are preventing sterling from making any ground against the dollar, and any gains that sterling does make are relatively limited and tend to come against the euro," said Angus Campbell, senior analyst at FxPro.

Sterling has fallen against its currency basket in each of the past five weeks, and is down against the euro for the past three.

The main TV debate of Britain's national election campaign last Thursday yielded no clear victor, underlining the uncertainty around the outcome of a vote that will take place on May 7.

Prime Minister David Cameron's Conservatives and Ed Miliband's opposition Labour Party are neck-and-neck in the polls with neither on track to win a majority.

"As things stand, not only is no one party in line to win an outright majority but widely touted coalitions ... would also fall short of the votes required," said BNY Mellon in a note.

"Inevitably there is talk that the election therefore augurs badly for GBP's longer-term performance, that a coalition of this kind, or the alternative of minority government would lead to instability and another election before the year is out."

In a growing sign of nervousness ahead of the election, there was solid demand for options to hedge against sharp sterling swings and which will expire in two months time.

The two-month implied vol for sterling/dollar was trading at 12.55 percent, implying uncertainty from the May election to spill over to June. The one-month implied vol , meanwhile was at 11.25 percent with the option expiring on May 7--the day the elections are to be held.