Pound stays firm on expectations of Conservative election win, off highs

LONDON (Reuters) - Sterling remained strong on Monday, buoyed by opinion polls that point to the ruling Conservative Party winning Britain’s general election on Thursday, though the currency surrendered some gains when a later poll showed their lead narrowing a little.

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

The pound earlier hit a seven-month high against the dollar and a 2-1/2 year peak versus the euro after British Prime Minister Boris Johnson’s Conservatives extended their lead over Jeremy Corbyn’s main opposition Labour Party.

The later poll, which showed their lead declining to six percentage points, put some pressure on sterling, which was last up 0.2% at $1.3159 GBP=D3. It had earlier hit $1.3280.

JPMorgan forecast sterling at $1.34 at the end of the year, but said “the story is not over”.

“There are a lot of scenarios and even a no-deal Brexit is not completely out of the picture,” said JPMorgan analyst Luis Oganes.

That would entail maintaining “some degree of cautiousness and we’re certainly not going all out on the currency”, Oganes said.

The pound was flat versus the euro at 84.20 pence EURGBP=D3, after jumping to as high as 83.94 pence, its strongest level in 2-1/2 years.

Speculators reduced their net short positions on the pound to $2.44 billion in the week to Dec. 3, more than halving the shorts since their peak of $7.81 billion this year. GBPNETUSED=

However implied volatility gauges for one week, a contract straddling the election date, have almost doubled in recent days, trading around 18.5% GBP1WO=.

Expectations the Conservatives would win an outright majority has boosted the pound as investors see this leading to parliament approving a Brexit deal Johnson has secured with the EU, ending three-and-a-half years of political paralysis.

But future sterling gains could be limited, given Britain will have to negotiate a new trade deal with the European Union after formally exiting the bloc on Jan. 31. The time allocated is less than a year, which analysts say is an impossible task.

British officials have also questioned whether Johnson’s claim that Britain will make a clean break with the EU in December 2020 can be achieved, fearing that a new customs arrangement for Northern Ireland may not be ready in time, the Financial Times reported.

This “points towards the likely need for an extension to the transition period beyond the end of next year, something Boris Johnson has pledged not to request,” said Lee Hardman, currency analyst at MUFG, adding that “it leaves open the risk of a no-deal Brexit towards the end of next year”.

“Once the initial euphoria fades over a positive UK election outcome, it will become more challenging for the pound to extend its advance in 2020,” he said.

(This story has been refiled to corrects paragraph 9 to show sterling implied volatility has risen, not fallen. Removes incorrect chart)

Reporting by Olga Cotaga and Dhara Ranasinghe; Editing by Gareth Jones & Simon Cameron-Moore