LONDON (Reuters) - The British pound drifted higher against the euro on Tuesday but stayed within recent trading ranges after survey data showed Britain’s services sector stagnated last month due to concerns about Brexit.
Against the dollar, though, the British currency fell slightly as the greenback strengthened on a better-than-expected ISM non-manufacturing PMI. The dollar also rose versus safe-haven currencies on growing signs that the United States and China are inching closer to a trade deal.
With the Bank of England set to hold interest rates unchanged at a policy meeting on Thursday and a national election less than six weeks away, investors will be watching closely any changes in opinion poll trends for the major political parties before adding positions on the pound.
“Unless you see a strong evidence of a Conservative Party win, it will be difficult for the pound to sustain (a position) above the $1.30 levels,” said Fritz Louw, an FX strategist at MUFG based in London.
While the BoE is almost certain to hold rates at 0.75%, weak economic data makes it increasingly likely that its next move will be a cut rather than a hike.
BNP Paribas economists said the BoE meeting would be a neutral event for the pound.
The central bank must also contend with prospects of the Dec. 12 election yielding another hung parliament, which could drag the Brexit debate beyond Jan. 31, the third deadline for Britain to leave the European Union.
“We are not very bullish on the currency yet,” said Georg Schuh, EMEA CIO at DWS.
While the risk of Britain exiting the EU without a deal to smooth the transition is considered to have been reduced, the main parties are at odds over how the divorce agreement should look.
Britain’s opposition Labour party leader Jeremy Corbyn declined on Tuesday to say if his party would stop the Brexit process to form a coalition if no party won a majority in December’s election.
A Yougov poll showed the ruling Conservatives with a 13 percentage-point lead over opposition Labour, while support for the Brexit Party has bounced four percentage points since Nov. 1.
“Risks are favouring a comfortable majority for the Conservatives,” said Stephen Jen, macro hedge fund manager at Eurizon SLJ. But even if the election result was unclear, sterling risks were skewed to the upside, he said.
Aside from Brexit and election newsflow, the Bank of England will be watching the economic data with some concern after construction PMI activity was reported on Monday to have shrunk for the sixth month in a row. On Tuesday, figures showed a 7% drop in new car sales.
IHS Markit’s services PMI edged up to 50.0 - which represents zero growth - from 49.5 in September, one of the lowest readings since 2009.
The all-sector PMI stayed below 50 for a third straight month, the first time this has happened since 2009.
Against the dollar GBP=D3, the pound fell 0.1%% to $1.2865, coming off an earlier session high of $1.2904. Versus the euro EURGBP=D3, the pound edged up 0.4% up to 85.98 pence.
Leveraged funds that bet on the direction of sterling reduced their short positions on the pound in the week to Oct. 29 to $2.606 billion, a six-month low, according to CFTC data on Refinitiv.
On top of that, “most corporate treasuries were hedged and net short sterling,” said Eurizon’s Jen, adding that sterling remains one of the most undervalued currencies in the developed world.
Reporting by Saikat Chatterjee; Editing by Andrew Heavens and Mark Heinrich