Pound gains as Conservative vote lead promises end to political uncertainty

LONDON: Sterling climbed from recent lows as polls continued to show the ruling Conservatives as runaway favourites to win the Dec. 12 election with a pledge to implement Brexit and halt 3-1/2 years of political uncertainty.
However, a recent poll showing the Conservatives’ lead over the main opposition Labour Party narrowing during the last week kept the pound under $1.29.
The pound was last up by 0.4% at $1.2883, having risen earlier to $1.2913, edging up further from the 10-day lows it hit on Friday when dire Purchasing Managers’ Index (PMI) data highlighted the weak state of the UK economy and underscored the low possibility of interest rate hikes in the near future.
Against the euro too, sterling firmed 0.5% at 85.44 pence . Earlier it rose to a one-week high of 85.30 pence.
Bookies have lengthened the odds of a hung parliament after the U.K. election, with the Conservatives now seen on track for a majority of almost 50 members of parliament.
But support for the Conservatives fell one point to 41%, while the Labour Party was up two points on 34%, an opinion poll by ICM for Reuters showed on Monday.
“Today when I was talking to clients they were asking why sterling is not stronger given the polls,” said Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America Merrill Lynch (BAML).
Earlier in the day, fresh data revealed that British retailers saw a stronger-than-expected improvement in sales in November and are more upbeat about the month ahead.
Prime Minister Boris Johnson unveiled the Conservatives’ election manifesto on Sunday promising more public sector spending and no further extensions to Britain’s protracted departure from the EU.
They also pledged no new taxes, in contrast to Labour, which has promised to raise taxes on the rich and businesses to fund a major expansion of the state.
Most polls show the Conservatives with a lead of at least 10 points over Labour. That, alongside a decline in fears of a no-deal Brexit, has pushed sterling almost 8% higher since early September.
“Most of the investors have missed the rally in sterling … They were not positioned for this,” said BAML’s Vamvakidis.
Speculators, on the other hand, have added some sterling short positions in the week to Nov. 19, according to the U.S. Commodity Futures Trading Commission. They now hold $2.58 billion of net shorts on the pound, though this is much less than the $7.81 billion held at the beginning of August.
One-month implied volatility is trading around 12%, having almost doubled from early November when the election was called but well off highs of over 14% hit in mid-October.
“Markets can only really see a Tory (Conservative) victory and it’s looking so likely that I don’t see it giving sterling much more support. Most of it is in the price already,” said Colin Asher, senior economist at Mizuho.

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