November 27, 2019 / 9:35 AM / 2 months ago

Sterling recovers ground, focus on polls after Conservative lead narrows

LONDON (Reuters) - Sterling was a touch firmer on Wednesday, recovering from early losses following the third poll in a row that showed a narrowing lead for the governing Conservative Party before Britain’s Dec. 12 election.

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

The pound initially fell as much as 0.3% in early London trading after YouGov data released on Tuesday showed the Conservatives’ lead over the opposition Labour Party tightening to 11 points.

Sterling may also have been weakened by reports of a surge in under-35s registering to vote before a Tuesday midnight deadline, since young people are perceived as less likely to support the Conservatives.

Having fallen as much as 0.3% to a low of $1.2827 in early London trading, sterling recovered over the course of the day.

In late trade it was 0.1% firmer at $1.2874 and was a quarter of a percent stronger versus the euro at 85.42 pence.

“So far, the market has been relatively complacent when it comes to the risks ahead,” said Thu Lan Nguyen, FX strategist at Commerzbank. “Yes, the Tories (Conservatives) still have the lead but they’re certainly not gaining.”

The surge in young voter registrations contributed to brief pressure on the pound, Nguyen said, but that was temporary. She did not expect the pound to start depreciating significantly in the run-up to the election.

YouGov will release seat-by-seat predictions of the election outcome at 2200 GMT. Its model accurately predicted the 2017 hung parliament, so it will be closely watched.

“Anything other than a prediction of a significant Conservative majority would be GBP-negative from current pricing,” Adam Cole, chief currency strategist at RBC Capital Markets, wrote in a note to clients.

Although polling has become an untrustworthy indicator of voting outcomes, analysts say it is becoming more prescient as the election gets closer.

“It’s going to be a noisy environment until there is a decisive shift (in the polls) that’s well beyond the margins of error, but given the experiences of 2016 and 2017, the bar will be high,” said Geoffrey Yu, head of the UK Investment Office at UBS Wealth Management.

“We prefer to play the ranges for the time being.”

Markets are not enthused by the outlook for the pound beyond the election.

Prime Minister Boris Johnson says a Conservative win would mean quitting the European Union with a deal on Jan. 31, leaving just 11 months to negotiate a free trade deal with the EU or face damaging World Trade Organisation tariffs.

Meanwhile, Labour leader Jeremy Corbyn is promising to nationalise swathes of the U.K. economy.

While Conservatives are campaigning to “get Brexit done”, Labour pledges a second referendum and the Liberal Democrats want to scrap Brexit altogether.

More British people think of themselves as “Leavers” and “Remainers” than as backers of a particular political party, a YouGov poll found, meaning that politicians’ stances on Brexit will be key.

Pound options suggest a perceived risk of depreciation. The implied volatility premium - which dealers charge to hedge the risk of the pound falling - has grown.

Reporting by Elizabeth Howcroft, Additional reporting by Sujata Rao; Editing by Larry King, William Maclean

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