Pound hits lowest level against dollar since 2010

Currency fluctuations can indicate a variety of concerns
Currency fluctuations can indicate a variety of concerns

The pound is at its lowest levels against the US dollar since just after the last general election as traders weigh the likelihood of another period of political uncertainty as well as signs of a slowdown in the recovery.

Sterling sank to 1.46 against the dollar after disappointing official figures from the production and construction sectors for February appeared to point to weakening UK economic growth.

But the currency has already been facing growing volatility with investors reportedly buying up insurance against sharp swings in its value, with the election less than a month away and the result still too close to call.

The pound has not been as weak since June 2010, just after the Coalition government was formed after days of horse trading.

Now, markets are looking ahead to a period of potentially greater uncertainty. A myriad of outcomes seem possible as the Scottish National Party and UKIP look set to add to the number of key players in the post-election landscape.

The path of interest rates will also be weighing on sterling, with signs of weaker growth likely to cement expectations that any hike from the current 0.5 per cent level will not take place until next year.

This weakens the pound against the dollar at a time when some policy makers at the US Federal Reserve are talking about a hike as early as this summer.

Also in the background is the UK’s £97.9 billion current account deficit for last year - at 5.5 per cent of gross domestic product the highest since records began in 1948.

The Bank of England this week said it would keep this under close review and warned its size could risk investors turning against the UK “in adverse circumstances”.

It noted that the credibility of Britain’s fiscal policy - Government tax and spending plans - as well as the country’s “continuing openness” made the deficit easier to finance. These will be affected by whoever forms the next administration.

Analysis by Colin Cieszynski and Michael Hewson of CMC Markets on previous polls that ended “in a muddle” found they were followed by sell-offs that “deepened as it became clear that there was no easy or quick resolution to the problems”.