Sterling nudges up in jittery trade as US election gets underway
LONDON, Nov 5 (Reuters) -The pound edged up on Tuesday as traders awaited the outcome of a U.S. election that has proven too close to call for weeks, and separately, the Bank of England's decision on interest rates later in the week.
Recent opinion polls have shown Democratic Vice President Kamala Harris and Republican former President Donald Trump virtually neck and neck, meaning the outcome might not be clear for days, or even weeks after voting ends.
With such immediate uncertainty hanging over the market, currency options volatility shot up on Tuesday, particularly for those currencies that are more sensitive to U.S. trade and foreign policy, such as the euro and Mexican peso.
Sterling options vol also rose, pushing overnight GBPONO= and one-week vol GBPSWO= - a measure of trader demand for protection against big near-term swings in the pound itself - to their highest since March 2023, when a U.S. regional banking crisis roiled markets.
The pound, meanwhile, GBP=D3 held reasonably steady in Europe, rising 0.2% to $1.2985.
Against the euro EURGBP=D3, the pound held at 83.91 pence, not far off last week's two-and-a-half month lows after British finance minister Rachel Reeves' high-tax, high-spend and high-borrowing budget plan sparked political and monetary uncertainty.
Alongside the budget, the Office for Budget Responsibility (OBR) trimmed its growth forecasts beyond 2025 and forecast UK inflation will average 2.6% in 2025, up from a previous forecast of 1.5% back in March, prompting traders to pare back their bets on a succession of BoE rate cuts.
"Uncertainty about the U.S. elections and higher volatility in global markets is also not helping the pound, which is trading on the back foot as it awaits the BoE decision on Thursday," BBVA strategists led by Roberto Cobo said.
The BoE is expected to deliver a quarter-point cut to interest rates on Thursday, much the same as the U.S. Federal Reserve, which delivers its own policy decision the same day.
But markets reflect a belief among traders that UK rates will fall more slowly than those in the United States or the euro zone in the coming months.
By next June, money markets are assuming U.S. and euro zone rates will be a full percentage point lower than they are now, whereas UK rates are only expected to fall by around 75 bps.
"We think it's too early for the BoE to pre-commit to a sustained cutting cycle or give clear guidance on the rate path," strategists at Bank of America said.
The pound is up 2% against the dollar this year - the only major currency to show any gain against the greenback at all. The offshore Chinese yuan CNH=D3, the runner-up, is roughly flat on the year, while the joint worst performers are the Japanese yen JPY=EBS and the Norwegian crown NOK=D3, with a near-8% loss.
Graphic: World FX rates in 2023 http://tmsnrt.rs/2egbfVh
Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv
Reporting by Amanda Cooper; Editing by Kirsten Donovan
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