Sterling has risen against the dollar ahead of tomorrow’s General Election, recovering the ground it lost yesterday after a closely-watched poll halved the Conservative party’s expected majority.
The rise continues the growth spurt sterling has been through since the start of December, which has been driven by polls predicting a Tory election victory. Traders by and large think this would bring some much needed certainty to the economy.
The pound was 0.42 per cent higher against the dollar by 3.45pm, buying $1.315. Against the euro, it was up 0.45 per cent to buy €1.188.
It shed around one per cent yesterday after survey firm Yougov released a detailed poll predicting a Tory majority of 28, down from a previous prediction of 68 made just two weeks ago.
Sterling fell as much as 0.8 per cent after its release, but recovered somewhat by close of play.
The poll thrust the prospect of another hung parliament front and centre. Such a result could see Jeremy Corbyn’s Labour party take power, propped up by the Scottish National Party and the Liberal Democrats.
However, analysts warned that if the Tories do not deliver a majority in tomorrow’s election, the pound could fall sharply.
Jordan Rochester, foreign exchange strategist at Japanese bank Nomura, said a Labour-led government could send sterling two to four per cent lower to around €1.276.
He said Labour’s policy of a “second referendum optimism is unlikely to outweigh the concerns of Labour’s reform and spending and nationalisation plans”.
Economist Dean Turner and head of UK investment Geoffrey Yu at Swiss bank UBS said said that under a Labour-led government sterling would likely “be stuck in a $1.25–$1.30 range until some clarity emerged”.
Yet they were more sanguine about a Labour government in the long term. They said the economy would make a “modest recovery as businesses and markets begin to reflect chance of remaining in the EU”.
Rochester said that while a thumping Tory majority would likely send sterling one to two per cent higher against the dollar, a slim victory would provide less of a rise.
He said the European Research Group (ERG) – a group of hardline Brexiters who have frustrated previous EU negotiations – would have a stronger hand and could scupper trade talks.
“This ERG factor will not be abundantly clear in political circles until in talks with the EU later on, but GBP may trade less than one per cent lower as a result as the market will be well aware of it.”
Fiona Cincotta, market analyst at trading platform City Index, agreed. She said: “A high Tory majority would mean reduced uncertainty over Brexit and the transition period. The pound could advance towards $1.35 in the near term.”