Sterling weakens as UK Conservatives' polling lead narrows

LONDON (Reuters) - Sterling fell on Tuesday after a second opinion poll showed the Conservative Party’s lead is narrowing before the British election next month.

FILE PHOTO: Pound Sterling notes and change are seen inside a cash resgister in a coffee shop in Manchester, Britain, Septem,ber 21, 2018. REUTERS/Phil Noble

Prime Minister Boris Johnson’s Conservatives have held an often double-digit lead over the opposition Labour Party in the polls for weeks. Hopes that a Johnson victory would end over three years of uncertainty over Brexit have lifted the pound, despite concern about any no-deal exit from the European Union.

A Kantar poll published on Tuesday showed Labour had squeezed the Conservative advantage to 11 points from 18 over the past week.

The poll was the second in two days to show a narrowing of the ruling party’s lead. On Monday, an ICM poll for Reuters gave the Conservatives a seven-point lead, down from 10 points a week earlier.

Sterling slipped 0.4 percent to as low as $1.2835, after rising to as high as $1.2913 on Monday.

Against the euro, the pound was down around 0.5 percent at 85.775 pence, off Monday’s one-week high of 85.30.

The British currency extended its drop in late London trading - likely down to the UK finance minister announcing that the Conservatives would hold an inquiry into Islamophobia within its ranks, according to Jane Foley, senior FX strategist at Rabobank.

Foley said sterling had heightened sensitivity to comments that the market would normally ignore because investors had cut their short positions on the pound in recent weeks and because the general election was just a little over two weeks away.

Earlier on Tuesday, Britain’s chief rabbi wrote in the Times newspaper that Labour leader Jeremy Corbyn was unfit to be prime minister because he had failed to stop anti-Semitism “sanctioned from the top” in his party.

Despite its broadly downward trajectory in the last week, sterling has only depreciated a little over 1% from its October rally, and is up 4.6% so far in the fourth quarter.

Most analysts say the pound is gaining on signs the Conservative Party is headed for victory on Dec. 12.

“The pound has strengthened as a reassuring Tory majority would mean that the risk of hard Brexit is small while avoiding political lock-ups in Parliament and getting a growth-oriented economic policy,” Lauri Hälikkä, fixed income and FX strategist at SEB, said in a note sent to clients.

“A Labour victory would certainly give a softer Brexit but also very radical socialist policies, which few believe would be good for the pound,” she said.

Expectations of a Conservative victory, alongside a decline in the threat of a Brexit without a deal to smooth the transition, have pushed sterling up nearly 8% since early September.

The Conservative party promises to take Britain out of the EU by Jan. 31 and negotiate a free trade deal with the bloc by end-2020. Labour is promising a second Brexit referendum and the pro-EU Liberal Democrat party is campaigning to cancel Brexit altogether.

Reporting by Tommy Wilkes and Elizabeth Howcroft, editing by Mark Heinrich