Sterling rises as investors take heart from likely Tory election win, for now

The pound hits its highest in nearly three years against the euro, but may struggle to retain its gains once the Dec 12 election is out of the way, say analysts

The Conservative party’s lead over the opposition Labour party has widened again, with just three days to go before the UK general election, according to a survey on Monday. But analysts have warned that the pound may struggle to retain its gains once the vote is out of the way.

A poll of over 1,000 British adults by Survation showed the Conservative party would take 45 per cent of the votes, a rise of 2 per cent on a similar poll conducted the previous week, while Jeremy Corbyn’s opposition Labour party would take 31 per cent, marking a decline of 2 per cent.

The pound rallied to its highest in nearly three years against the euro and to its strongest in seven months against the dollar following the results.

Sterling is on course for a rise of more than 5 per cent in this final quarter of the year, boosted by the extension to the deadline for the United Kingdom to leave the European Union to January, from an original date of October 31, and by the growing certainty that prime minister Boris Johnson’s Tory party will secure a working majority at this week’s election.

Marc Ostwald, ADM global strategist and chief economist, said in a daily note that while the markets were discounting a Tory win, the prospect of a surprise, given the unreliable nature of recent election polls, has made some investors wary.

“Another hung parliament would of course prompt a very negative reaction, but even a clear majority may prompt a ‘sell the fact’ reaction after an initial knee-jerk positive response, given that such an outcome only really ensures passage of the Withdrawal Agreement Bill (from the EU), without removing any of the uncertainties related to the UK's future trade relationships with the EU and indeed the rest of the world, let alone resolve the many domestic economic and structural challenges” Ostwald said.

A short position is a bet against a sustained price rise, but in this instance, it provides scope for further buying.

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Financial markets seem to suggest a preference among investors for a clear Johnson victory and, indeed, the Survation poll showed voters are less undecided ahead of Thursday’s election, the fourth in almost five years that comes just weeks before the UK’s planned departure from the European Union, scheduled for January 30, 2020.

“As is normal as an election date draws closer, the level of respondents we interviewed who said they were undecided this week’s poll was 12 per cent, down from 17 per cent last week – and so some of the movement we are seeing in this week’s polling may be driven by the public, having seen the various TV debates and manifesto launches simply making their minds up,” said Damian Lyons, Survation chief executive.

Sterling, which has risen by more than 6 per cent this year against the euro and by more than 3 per cent against the dollar is one of the better-performing major currencies of 2019, compared with the euro’s 3.3-per cent drop against the greenback, the Japanese yen’s 1.1-per cent gain versus the US currency or the Chinese yuan’s 2.4-per cent decline.

However, the pound is still worth almost 10 per cent less than it was in the run-up to the EU referendum in June 2016.

FURTHER READING: The UK election: prediction potential market scenarios

FURTHER READIN: Boris Johnson postpones corporation tax cuts

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