Sterling hit its highest level against the dollar in almost two weeks on Tuesday, buoyed by expectations that the ruling Conservative party would be victorious in Thursday’s elections and would probably win a majority of parliamentary seats.
The pound has tended to react positively to signs that Prime Minister Theresa May’s party would win the snap election since she called it seven weeks ago, as investors bet that a strong majority would translate into a better bargaining position in exit talks with the European Union, which begin this month.
But after hitting eight-month highs above $1.30 in mid-May, sterling fell to as low as $1.2770 by the end of the month, as polls showed the race tightening between the Conservatives and the left-wing Labour opposition, which wants to increase public spending and is viewed by markets as less business-friendly.
It has since recovered, though, climbing back above $1.29 on Monday after an ICM poll carried out from June 2 to June 4 showed the Conservatives with an 11 point lead over Labour. While that was down from a 12 point in the same poll a week earlier, it was a wide enough margin to soothe investors’ nerves over the possibility of a hung parliament.
Another poll later on Monday from Survation for ITV television put the Conservatives’ lead at just 1 percentage point, but other polls have put it as high as 12 points.
“When you’ve got a poll that shows an 11-point lead three days before the election, that’s sizeable,” said ING currency strategist Viraj Patel.
“If the polls were really tight – all of them, consistently – then you would have more uncertainty. But the balance is now tilted towards the view that we’re going to get a Conservative majority, so now it’s just a question mark of the size of that majority.”
Sterling peaked as high as $1.2951 on Tuesday against a broadly weaker dollar, its highest in 12 days, before edging back to trade up 0.1 percent on the day by 0850 GMT at $1.2923.
Against the euro, sterling was up 0.2 percent at 87.06 pence.
One-week sterling-dollar implied volatility – a hedge against price swings in the currency – was at 12.5 percent, near its highest levels since Jan. 17, when May set out her Brexit strategy.
“Yes, the UK election is still something which markets are still worrying about, but one thing which is pretty much certain within the UK elections is that there is no (Brexit) U-turn on the cards,” wrote ThinkMarket analysts in a research note.
“Therefore, political risk is somewhat a limited factor.”
(Editing by Kevin Liffey)