UPDATE 1-Sterling trades flat, political risks limit gains

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Adds comment, updates prices, adds chart)

LONDON, April 29 (Reuters) – The pound was steady on Thursday, little changed against the dollar and euro, having been temporarily boosted overnight after the Fed’s dovish outlook prompted a weaker dollar.

Sterling hit a nine-day high of $1.3979 in Asian trading after the U.S. Federal Reserve said it was too early to consider rolling back its emergency support – a dovish tone which pushed the dollar to nine-week lows.

But the pound soon lost these gains as currency market moves were small.

At 1051 GMT, it was at $1.3937 flat on the day and up just 0.4% on the week so far. Versus the euro, it was flat at 86.95 pence per euro, stuck in the narrow range it has traded in for most of April.

Investors are watching political developments in Britain, as Prime Minister Boris Johnson is under pressure from a series of accusations about how he responded to the COVID-19 pandemic and who paid for the refurbishment of his flat, as well as an inquiry into leaks of private information from his office.

Britain’s Electoral Commission began an investigation on Wednesday into the refurbishment of Johnson’s Downing Street apartment, saying there were grounds to suspect an offence may have been committed.

“Although also benefiting from the softer USD environment and GBP/USD is very close to the 1.4000 level, political woes are limiting the GBP upside,” ING strategist Petr Krpata wrote in a note to clients, citing the Electoral Commission’s investigation.

“Coupled with the upcoming Scottish elections, all this points to limited near-term upside to GBP,” he added.

Britain holds regional and local elections on May 6, including a vote in Scotland expected to produce a pro-independence majority there. Scotland voted narrowly to remain the United Kingdom in 2014, and most analysts consider another referendum on independence to be unlikely.

“Markets have started to reflect the potential risk of Scottish independence following the election,” said Kallum Pickering, senior economist at Berenberg.

“A further modest drop in sterling could follow a majority result for Scottish nationalists. However, while Scottish independence remains a risk to take seriously, the chance that Scotland actually leaves the UK, even in the event of a majority for nationalists on 6 May, remains low.”

But Michael Hewson, chief market analyst at CMC Markets said that people were over-estimating the significance of political risk around Johnson or the Scottish elections and that these narratives were gaining traction because of a lack of other drivers to explain the pound’s relative stasis.

“I’m still fairly bullish on it. I think that we’re likely to get a fairly decent economic rebound over the course of the next few months… I still think that Europe is going to lag behind, when it comes to the recovery.”

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