Sterling recovers ground as investors look through polls

LONDON (Reuters) - Sterling reclaimed lost ground against the dollar and euro on Thursday, as investors looked through radically conflicting polls on Britain’s election next week.

FILE PHOTO: British Pound coins are seen in this picture illustration taken January 18, 2017. REUTERS/Dado Ruvic/Illustration/File Photo

The pound has shed only some of its almost 4 percent gain since the election was announced, suggesting investors are keeping to their original bet on a victory for Prime Minister Theresa May and her Conservative Party.

Investors had bet a then-predicted landslide for May would translate into a stronger hand in Britain’s exit negotiations with the European Union.

But recent polls predicting outcomes ranging from a slim majority for the Conservatives to a hung parliament for the vote on June 8 have shaken some investors, causing the pound to see-saw over the past week.

A new poll showing only a 3 percent lead for May continued to keep it lower for most of the European session on Thursday.

But sterling had risen by the London afternoon, hitting the day’s high of $1.2916 by 1535 GMT.

It also rose 0.4 percent to 86.84 pence per euro.

“The markets have certainly stabilised,” said Kathleen Brooks, research director at City Index.

“We’re very much range-bound in the pound as we lead up to this election so it suggests that there’s such a disparity in the polls that the market is not taking one poll as truth.”

Brooks added that a survey showing strength in Britain’s manufacturing sector may have also given the pound a slight boost.

The Markit/CIPS manufacturing purchasing managers’ index (PMI) slipped to 56.7 in May from a three-year high in April. Aside from the previous month’s PMI, that was its strongest reading since June 2014.

Several analysts flagged a two-year period of exit negotiations with the European Union for Britain as a looming risk for investors.

“We expect sterling downside to remain a risk as broader uncertainty is likely to continue, given investors’ focus will swiftly shift to actual Brexit negotiations,” Credit Agricole strategists wrote in a note.

That chimed with the view of strategists at Swedish bank SEB, who said selling sterling versus the Swedish crown was one of their strongest calls.

“The UK is facing a hard Brexit and a very uncertain political period ahead. Although undervalued, we think sterling will remain weak to compensate for the loss of access to the single market.”

Reporting by Ritvik Carvalho; Editing by Alison Williams