LONDON: Sterling has remained surprisingly resilient to the risks from uncertainty from a closely fought British general election, Goldman Sachs said in a note, adding that the pound will ultimately be driven by the solid growth of the economy.
"While sterling may have room to price further election risk, we look to past election cycles to demonstrate that political uncertainty, of itself, has not been decisive for the currency, whereas the macro backdrop is key," Goldman analysts said in a report made available on Friday.
On a trade-weighted basis, sterling has hit six-week peaks this week, while against the dollar and the euro it was trading near five-week highs.
It has gained this week, lifted by a growing view within the nine-member monetary policy committee of the Bank of England that the next move by the central bank will be a rate hike. The BoE also flagged upside risks to inflation in its minutes released this week.
A Reuters poll this week suggested that the first move to raise rates would likely come in early 2016, although the economists polled attached only a median 60 percent likelihood of a first move by the end of next March.
Hedge funds were said to be among those buying sterling, which was on track for a 1 percent rise on the week and its biggest two-week gain against the dollar since the immediate aftermath of Britain's last general election five years ago. Nevertheless, investors have been buying insurance to hedge against bouts of volatility in the currency in the weeks around the May 7 poll.
Polls show the governing Conservative and opposition Labour neck and neck, making a 'hung parliament' likely in which no single party commands a majority.
A strong showing by smaller parties also makes it hard to predict what kind of government will emerge, but the prospect of coalition means a future government "is likely to be pulled towards the centre ground", Goldman said. "Election uncertainty on its own is unlikely to determine the course of the currency. Moreover, our positive outlook on UK activity means that, other than the dollar, we continue to forecast that the pound will appreciate against most G10 currencies, particularly the euro." Goldman forecast euro dropping to 65 pence over the next year, from around 71.75 pence on Friday.
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