Pound Nears $1.49; at 9-Month Low

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LONDON—Sterling dropped to its lowest level against the dollar in nine months, battered by political, economic and monetary-policy risks.

The outlook on the currency is now looking increasingly grim, with data released late last week already suggesting some traders' negative bets on the pound against the dollar have surged to an all-time record.

Opinion polls in the weekend press have shown a shrinking lead for the Conservative Party ahead of the general election, which must be held by June. On top of that, uncertainty surrounds the Bank of England's monetary policy meeting Thursday. All this means the currency may be in for a very testing week.

"It continues to be all negative for the pound at the moment," said Audrey Childe-Freeman, an analyst at U.S. bank Brown Brothers Harriman in London.

"Dreadful economics, an uncertain monetary policy environment and highly uncertain politics will all leave sterling vulnerable in the near term," she added.

Already Monday, sterling has slipped to a nine-month low against the dollar, dropping well under $1.50, while the euro, which has had its own problems amid concerns about the heavy debt loads of some member countries,has surged far above £0.90 for the first time since early January.

Political opinion polls have become a key driver for sterling in recent weeks as the Conservatives' lead has shriveled from around 13 percentage points in December to just 2 percentage points now. That suggests no single party may win a majority—a situation known as a hung parliament that would make it even tougher for any party to fix the U.K.'s public-spending stresses.

"A hung parliament is one of investors' key fears for sterling," said Paul Robinson, a strategist at Barclays Capital in London. "Risks in the short run remain to the downside for the pound."

On top of that, investors appear jumpy over whether some members of the Bank of England's rate-setting committee will push for a fresh extension of its quantitative easing program this week.

"Uncertainty is always a bad thing for a currency, and at the moment, there's uncertainty about the uncertainty," said Geoffrey Yu, a currencies analyst at UBS AG in London. Investors are starting to position themselves for the risk of a brutal sterling crisis, Mr. Yu added.

The main chance for some short-term support for the plunging pound may now come from the fact that it has already been sold very heavily.

Friday, data from the Commodity Futures Trading Commission showed negative sterling bets against the dollar among non-commercial traders on the Chicago Mercantile Exchange hit a record high in the week running up to Feb. 23.

Those traders don't represent the whole of the market, but they are often seen as a proxy for hedge funds as a whole. With these data suggesting there has already been a sterling-selling frenzy, waning momentum or the closing of successful bets could kick in to give the pound a modest boost soon.

"We may see a short-term correction, but I would not expect a major rally ahead of the BOE on Thursday," UBS' Mr. Yu said.

Sterling recently traded at $1.4907, down 2.2% from levels late Friday in New York. The euro was at £0.9070 against the pound, up 1.6%. Sterling also hit 25-year lows against the Canadian and Australian dollars.

Source: http://online.wsj.com/article/SB10001424052748704754604575095213863481120.html