The pound dropped below $1.29 against the US dollar overnight as polls revealed a surge in support for Labour under Jeremy Corbyn, an outcome which would raise the chances of a hung Parliament.
Sterling fell by as much as 0.52 per cent compared to last night’s levels, to hit its lowest value against the dollar in more than a week.
Analysts said the drop was down to a Yougov poll for the Times newspaper which showed the Conservative poll lead has fallen to only five points, at 43 per cent over 38 per cent.
Tory support appears to have taken a severe hit since a shambolic manifesto launch in which May U-turned on a major policy which could have resulted in some pensioners using their homes to pay for social care.
The bomb attack in Manchester and the suspension of campaigning has added more uncertainty to lead-up to the General Election on 8 June.
Markets have so far greeted the prospect of the strong Tory majority signalled by most polls up to this point as positive for the pound.
Jordan Rochester, a foreign exchange strategist at Nomura, wrote in a note to clients: “The pound is likely to continue to be under pressure now until the election is out of the way if polling continues to indicate it’s a tighter race.
“For the market the worst outcome is if we have further uncertainty with the chances of a hung parliament.”
After Prime Minister Theresa May called the snap election, to the surprise of pundits and investors, the pound jumped to near six-month highs. Investors predicted May would win a landslide majority, strengthening the chances of a more pragmatic deal with the EU after Brexit, in the face of Corbyn’s low personal popularity.
Craig Erlam, senior market analyst at Oanda, said: “With this kind of momentum and almost two weeks to go until the vote, not only is this not going to be the breeze that May anticipated when she called the snap election last month, it could yet turn into a humiliating defeat for the Conservative leader and her party.”