LONDON (AFX) - Sterling fell against most leading currencies in midday trade as the prospect of a referendum on European Monetary Union continued to impact negatively on the unit, dealers said. Jane Foley, strategist at Barclays Capital said sterling's weakness was politics-related rather than economics-related since "the market was pricing in the risk that a strong Labour majority would increase the likelihood of an early referendum on EMU."
"As long as there is a perception that a referendum could happen sooner rather than later, then the EMU issue is going to be the one that dominates the pound," she said, adding "the market perceived that sterling would move back towards long term fair value levels before it is fixed forever against the euro. Generally by most academic metric measures, sterling is presently over priced vs the euro."
As the single European currency strengthens against sterling, the latter becomes totally vulnerable to the dollar strength, she observed.
"If sterling is becoming more stable against the euro as the entry date approaches, assuming there will be an entry date, then it means that sterling/dollar trade would be purely a proxy of the movement on euro/dollar," she added.
Today's weakness in sterling also followed the release of a sharp monthly fall in UK manufacturing output for April.
But Foley thinks the data has been overlooked and that the politics have taken precedence.
A trader with Bank of Boston said sterling should see good support, with option protections set at 1.38 usd. Little activity was seen on the euro/dollar pair so far, dealers said, possibly because market consensus is in favour of a no-change in interest rate today.