The pound strengthened on Wednesday, benefiting from a weakening dollar and a report showing that British services sector growth cooled in June but not as sharply as forecasted.
The U.S. dollar softened against most currencies, except the Japanese yen and Chinese yuan, following comments from Federal Reserve Chair Jerome Powell suggesting that interest rate cuts might be imminent.
Sterling rose by 0.13% to $1.2703, marking its fifth consecutive day of gains, and remained flat against the euro at 84.72 pence.
The S&P Global UK Services Purchasing Managers Index dropped to 52.1 in June from 52.9 in May, the lowest since November but revised up from a preliminary estimate of 51.2.
S&P Global attributed the slowdown to businesses adopting a “wait-and-see” approach ahead of Britain’s national election on Thursday. Polls indicate that the opposition Labour Party is likely to win, potentially with a record-breaking majority.
“The UK election is unlikely to be a major market event. If the exit poll at 10 pm UK time (2100 GMT) shows a (large) Labour majority and the Conservative party as the second largest party, the market will quickly move on to focus on other factors,” stated Deutsche Bank strategist Shreyas Gopal in a note.
These “other factors” include the final round of voting in France’s parliamentary election on July 7, and significant UK data expected later in the month, which could influence the Bank of England’s decision to cut rates at its August meeting.
Gopal added, “We remain constructive on the pound, having recently lowered our year-end forecast for euro/sterling to 82 pence.”
Futures markets indicate that traders see about a 50/50 chance of a rate cut at the August 1 meeting, with a cut fully anticipated by September.
Investors are holding a long position in sterling worth $3.5 billion, down from a high of $4.15 billion two weeks ago, according to weekly data from the U.S. markets regulator.