Sterling weakens as election jitters overshadow strong UK data

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By Jemima Kelly

LONDON, April 1 (Reuters) - Political worries trumped good economic news on Wednesday, sending sterling down against the dollar and the euro, with investors growing increasingly jittery about next month's too-close-to-call British election.

Data showing Britain's manufacturing sector grew at the fastest rate in eight months in March gave the pound little respite. By afternoon trade, it was down 0.2 percent against the dollar at $1.4790 and 0.3 percent lower against the euro at 72.635 pence per euro.

Attention is swinging to a seven-way TV debate between Britain's party leaders on Thursday, which will shed the spotlight on the political risks ahead.

The latest opinion polls point to a hung parliament, in which no single party can form a government on its own, leaving open the possibility of a whole range of coalition agreements.

"There's no doubting that the UK fundamentals are consistently robust, but traders have chosen to ignore relatively strong economic data once again," said Jameel Ahmad, chief market analyst at FXTM, adding the May 7 election was weighing on sentiment.

The inclusion of seven parties in Thursday's debate, including the anti-EU UKIP, is seen as a sign of just how fragmented Britain's political landscape has become.

Reflecting some of the nervousness, the two-month implied volatility, which investors can buy to hedge against big swings in sterling's exchange rate over the election and in the three weeks after it, remained close to a 3-1/2-year high hit the previous day of 13.2 percent.

"At the moment there are too many (political) uncertainties," said Simon Smith, director and chief economist at online broker FxPro.

"And the way the Bank of England is looking at the moment, there's no anticipation of any change in policy so it's got that much harder for the data to have any effect on the currency."

The manufacturing data followed strong final growth data on Tuesday, which showed Britain's economy expanded at a quarterly 0.6 percent in the last three months of 2014, revised up from a previous reading of 0.5 percent.

That gave a small boost to the pound on Tuesday, which hit a one-week high against the euro. Sterling has struggled in the past few days on growing expectations that the Bank of England will keep interest rates lower for longer as well as growing investor jitters over the election. (Additional reporting by Anirban Nag; Editing by Alison Williams)