Sterling suffered its heaviest one-day fall against the euro since early January on Monday, as investors bought back into the single currency after a run-off between two nationalist, anti-EU candidates was averted in France’s presidential race.
Centrist candidate Emmanuel Macron and the far-right Marine Le Pen advanced to the second round, driving sharp gains for the euro as investors took heart from opinion polls showing Macron would soundly beat Le Pen – who has threatened to pull France out of the euro zone.
The first round outcome spared investors their worst-case scenario of Le Pen facing off against a surging far-left eurosceptic Jean-Luc Melenchon, who had climbed in the polls in recent weeks, though never broke into the top two.
The accuracy of pollsters ahead of Sunday’s vote bolstered confidence in their projection Macron would soundly win on May 7.
Having rallied almost 2 percent last week to hit four-month highs against the euro after British Prime Minister Theresa May called a snap UK election, sterling reversed most of that move, falling around 1.4 percent from Friday’s close to just below 85 pence per euro.
“Because the polls were so accurate for round one, the fact that they show Le Pen losing substantially in round two is a reason for exuberance,” said BMO Capital Markets currency strategist Stephen Gallo, in London.
“I think sterling remains a buy on dips versus the euro,” he added, suggesting that sterling would probably trade sideways in the lead-up to the June 8 British election.
Against the dollar, sterling was not far off highs hit last week following May’s election announcement, down around 0.2 percent on the day at $1.2790.
“I can’t say we have many local drivers at the moment (for sterling/dollar) really…the main volatility is coming from euro/sterling and that is mainly euro-driven,” said Thu-Lan Nguyen, currency analyst with Commerzbank.
She said economic data would be an important driver for sterling. The UK economy’s relative resilience to the uncertainty generated by last year’s Brexit referendum has propped up the currency this year following a near 20 percent slide. But doubts, particularly over consumer demand, are growing, fuelled by another poor batch of retail sales numbers on Friday.
Preliminary first quarter gross domestic product data are due on Friday.
Eyes will also be on the start of campaigning for Britain’s general election, with polls showing the ruling Conservative Party has a comfortable lead over the opposition Labour Party.
(Editing by Richard Lough)