Sterling edges down as investors eye UK election result

LONDON (Reuters) - Sterling slipped against the dollar on Thursday while market bets on how volatile the currency will be over the next 24 hours touched their highest in a year, as Britain voted in a national election that some polls have suggested is too close to call.

An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration

Sterling GBP=D3EURGBP=D3 had hit a two-week high of $1.2978 in morning trade in London after polling organisations' last surveys, but slipped back later in the day to trade down 0.2 percent at $1.2939 by 1555 GMT.

The pound gained as much as 4 percent after Prime Minister Theresa May called a snap election seven weeks ago. Polls initially suggested a landslide win for May’s Conservatives that was seen giving the prime minister a stronger hand in Britain’s looming negotiations on leaving the European Union.

But sterling has since fallen from its highs as the polls have narrowed.

“The market has not bet everything on having a nice clear outcome - it knows we might get a surprise,” said Societe Generale chief macro strategist Kit Juckes, adding that a Conservative victory would therefore be likely to drive a clearout of short positions and a stronger pound.

“The only outcome that’s got enough clarity to get short-covering is a bigger Conservative majority.”

Volumes of spot trading in sterling against the dollar were less than half of their normal daily averages, with the bigger price action in options contracts used by companies and investors to hedge against major swings in the currency.

Sterling overnight implied volatility surged past 30 percent against both the euro and the dollar EURGBPONO=GBPONO= before easing back a little later in the day.

Against the euro those were the highest rates since the aftermath of last year’s Brexit referendum vote to leave the European Union, pointing to nerves that an upset could deny May an outright victory.

“The pound is likely to stage a modest relief rally if the Conservatives secure a larger majority,” said Lee Hardman, a currency analyst with MUFG in London.

“The final polls support that assumption revealing that the Conservatives hold an average lead of around 7.5 percentage points, which compares to the 6.5 percent advantage they won over the Labour Party in the 2015 elections.”

There has been a wide split in polling ahead of Thursday’s vote - some surveys showing May only 1-3 points ahead while others give her an 8-10 point margin.

Editing by Gareth Jones