Currency traders have also been unsettled by signs of weakness in Britain’s manufacturing sector



Analysts have warned that the pound could fall further as financial markets react to the closest general election for more than 20 years and weaker than expected economic data.

Sterling fell to a five-year low of $1.4623 on Friday morning from $1.4802 on Thursday.

The drop followed signs of jitters in markets on Thursday as investors bought insurance against sharp swings in the value of the pound. The pound rose slightly against the euro this morning to €1.3820.

Currency traders were also unsettled by lower than expected industrial production in February that augured a growth slowdown in the UK economy. Industrial production rose just 0.1% in February due to a big fall in North Sea oil production. Economists had expected an increase of 0.3%.

Michael Hewson, chief market analyst at CMC Markets, an online trading business, said: “The pound has started to come under some pressure in recent days as the prospect of political gridlock in a few weeks’ time starts to become a real possibility, at a time when some of the economic data is starting to show some signs of weakness.”

The weak industrial production figures followed a widening of Britain’s trade deficit with the rest of the world. Official figures showed on Thursday that the gap between goods and services sold abroad and imported grew to £2.9bn in February from £1.5bn in January.

Alan Clarke, head of European fixed income strategy at Scotiabank, said the figures suggested economic growth weakened to 0.4% in the first quarter of the year from 0.6% quarter-on-quarter growth in the last three months of 2014.

Clarke said: “This is not going to make pleasant reading for the coalition government in the final days of the election campaign.”

With less than a month until election day on 7 May, there had been little to divide Labour and the Conservatives in the opinion polls. The last time an election was so tight was 1992, when Labour led for most of the campaign but the Conservatives scraped a small majority.



Against this backdrop, the cost of insuring against volatility in the pound’s value against the dollar over the next month rose to its highest since September 2011 on Thursday.

Figures from the Debt Management Office, the government body which sells UK sovereign debt, also showed foreign investors cutting their holdings of UK government bonds over concerns about an electoral stalemate and the stability of the pound.

Election concerns have not fed through to share prices, however. The FTSE 100, which reflects the fortunes of the global economy at least as much as the UK’s, rose 23 points, or 0.3%, to 7,039 in early trading.

Augustin Eden at Accendo Markets said: “The positive open comes as part of a global wave of positive Thursday performances on the back of an oil price recovery that helped energy stocks.”

Investors were also positive on Greece’s payment of a €450m (£325m) debt to the International Monetary Fund on Thursday.

Hewson and colleagues at CMC said the pound and share prices could be hit by a prolonged stalemate if there was a second consecutive hung parliament. “Stock markets hate uncertainty, and the potential for an unstable government following a close race could impact the FTSE and the pound in the days and weeks following a close race until a workable solution is found, if indeed there is one.

“A scenario where one of Labour or the Conservatives wins the popular vote and one wins the most seats could add to the potential mess and uncertainty.”

They said the ideal result if no party gains a majority would be another Conservative-led coalition, and that markets fear a fiscally profligate Labour-led government. However, business leaders are also concerned about the possibility of the UK leaving the EU after the referendum David Cameron has promised.

