LONDON, April 2 (Reuters) - Political worries took centre-stage for sterling on Thursday, driving it lower as investors focused on a TV debate between Britain’s party leaders later in the day.
A surge for the euro against the dollar dominated trading as Europe wound down for the Easter holiday weekend, with many traders moving to remove exposure to U.S. jobs numbers on Friday, a holiday in most of Europe.
But while the pound matched the dollar’s one percent fall, reaching 73.31 pence per euro, it made no progress against the greenback to compensate, steady at $1.4813.
“A couple of things suggest the market is starting to get concerned about UK political risk,” said Kathleen Brooks, research director at retail platform Forex.com in London.
“Volatility in dollar-sterling options expiring in 3 months’ time is at a 4-year high, and has been steadily rising as we move into UK election season. This compares with dollar-yen, where volatility has moderated. The pound is one of the most volatile currencies in the G10 as we lead up to polling day.”
Prime Minister David Cameron will face off against six political rivals at 1900 GMT on Thursday, the first and only full televised debate ahead of unusually tight national elections on May 7.
Neither Cameron’s Conservatives nor Ed Miliband’s Labour Party have a clear lead in the polls, while a possible referendum on Britain’s EU membership, promised by the Conservatives, is adding to nervousness among investors.
Data released on Thursday showed growth in Britain’s construction industry slowed in March, although confidence hit a nine-year high.
“The data in the UK has been OK recently but all the attention is starting to be on the election,” said Michael Sneyd, a currency strategist at BNP Paribas in London.
“Even if we were to get really strong upside surprises in UK data, I don’t think it’s going to be enough to move sterling ahead of early May.”
Data showing Britain’s manufacturing sector grew at the fastest rate in eight months in March gave the pound little respite on Wednesday.
The inclusion of seven parties in Thursday’s debate, including anti-EU UKIP, is seen as a sign of just how fragmented Britain’s political landscape has become.
Two-month implied volatility, which investors can buy to hedge against big swings in sterling’s exchange rate over the election and in the three weeks after it, remained close to 13.2 percent, a 3-1/2-year high hit earlier in the week.
“Focus on politics (is) likely to continue to intensify into this evening’s debate (and) could act as a drag on sterling,” wrote Citi analysts in a research note. (Editing by Toby Chopra)