The British pound bounced back yesterday ahead of a UK general election, even though a fresh poll predicted Prime Minister Boris Johnson’s ruling Conservatives would win a much smaller majority than previously forecast.
Sterling initially fell sharply before recouping losses to show a gain of 0.1% against the dollar in late exchanges.
The narrowing of the Conservative’s lead just a day before the vote has cast some doubt on the expectations of a definitive outcome that have boosted sterling in recent weeks. The British currency was last up 0.2% at $1.3180, not far from the eight-month high above $1.32 it hit on Tuesday. Against the euro, it rose by the same amount to 84.15 pence but remained below Monday’s 2-1/2 year high of 83.94.
The pound has rallied in recent months on growing expectations the Conservatives would gain an outright majority, helping them pass a withdrawal deal with the European Union that was agreed in October – and ending 3-1/2-years of uncertainty.
“Less Brexit uncertainty in itself can deliver a wide enough gap between growth expectations in the UK and its major partners such that sterling is not going to be a favourite short,” said Geoffrey Yu, head of the UK investment office at UBS Wealth Management.
Leveraged funds held $2.44bn in net short positions on the pound in the week to December 3, CFTC data showed, and analysts said there is still room for those positions betting on a fall in sterling to be unwound, which could drive the pound higher.
In betting odds data released following the YouGov poll, the chance of a Conservative majority fell to 69% from 80% two days earlier, according to betting platform Betfair.
Betfair said this compared to an 83% chance of a Conservative majority the day before the election in 2017, when no party won a majority in a surprise result.
The probability of a hung parliament is also higher this time round – 29% rather than 14% right before the 2017 election – demonstrating the difficulty of predicting the result.
With the market betting on some sort of Conservative majority, a hung parliament could hit sterling hard, pushing it down to $1.26, according to ING analysts.
Gains in the event of a Conservative majority are expected to be less pronounced, since this outcome has largely been priced in, according to ING analysts. They expect the pound to rise to $1.35 if there’s a large Conservative majority and $1.33 if they have only a slender majority.
Pre-election jitters weighed however on the British capital’s FTSE 100 index of blue-chip companies, which was essentially unchanged as caution prevailed.
Frankfurt’s DAX 30 gained 0.6% to 13,146.74 points and Paris’s CAC 40 was up 0.2% to 5,860.88 points at the close yesterday.
A key poll released late Tuesday showed Johnson’s lead over veteran socialist Jeremy Corbyn’s Labour party ebbing away.
“The highly-regarded poll shows that the Conservative advantage has slipped.
This is the poll that correctly predicted a hung parliament in 2017 – and indicates that the scenario could repeat itself,” said analyst Fiona Cincotta at trading firm City Index.
The YouGov opinion poll said the Tories would win today’s vote, with a majority of 28 seats, sharply down from the 68 forecast in a similar study at the end of November.
Sterling has surged in recent weeks – sitting at an eight-month high against the greenback and a two-and-a-half-year peak against the euro – on expectations Johnson would win a big enough majority to push through his Brexit deal.
However, the narrowing polls point to the possibility of another hung parliament – which would lead to more uncertainty in Westminster and drag out the Britain-EU saga even longer.
“There’s a bit of a waiting mode at the moment,” Oanda analyst Craig Erlam told AFP.
“There’s probably too much optimism in the market right now, a bit of complacency even.”
In afternoon New York trades, the Dow Jones index showed a loss of 0.1%.
Elsewhere, Asian markets mostly rose yesterday but investors are growing nervous at the lack of news on China-US trade talks, with Washington yet to cancel tariffs on a swathe of Chinese goods planned for the weekend.
Negotiators are still trying to hammer out a mini agreement and the mood on trading floors remains upbeat, while most observers are confident the two sides will reach a deal, which has fed a global equities rally for weeks.
However, a fresh round of levies on $160bn of Chinese exports to the US is due to be imposed on December 15, and there has been no word from the White House on a possible delay to that date.
The removal of tariffs is a key demand of Beijing in the talks.
And on Tuesday Donald Trump’s top economics adviser Larry Kudlow warned that the measures remained in play for now.
The Federal Reserve’s policy decision later Wednesday is in focus too, with the central bank’s plans for monetary policy next year being watched closely.
Analysts nonetheless widely expect the central bank to hold off making any moves on interest rates as it assesses the state of the US economy.
from Gulf Times https://ift.tt/2PaXAiY
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