Thursday 18 January 2018

Pound volatility up as Labour closes gap in UK election

PM Theresa May’s hopes of an overall majority under threat. Photo: REUTERS
PM Theresa May’s hopes of an overall majority under threat. Photo: REUTERS
Donal O'Donovan

Donal O'Donovan

Dramatic tightening in the UK's general election race has already hit the pound, with sterling tipped to plunge further if a surge by Labour's Jeremy Corbyn prevents Theresa May securing her expected overall majority.

Latest polls show Mrs May's Conservatives with 43pc support, compared to Labour's 36pc. Earlier in the month, the gap was as high as 24 points between the two big parties.

A YouGov/'Times' poll yesterday put the Liberal Democrats on 9pc and Ukip on 4pc, with Scottish, Welsh as well as Northern Ireland's nationalist and unionist parties also in the mix.

If the Conservatives fail to win an overall majority, coalition talks, including with parties opposed to Brexit, could be extremely difficult.

Sterling dropped on Friday, rounding off the worst week this year, and is now tipped for weeks of volatility as investors question whether prime minister Mrs May will achieve the increased majority the market had in effect priced into the pound for the past few weeks.

"If there is one thing markets do not like, it's uncertainty and for the next two weeks the election looks to be providing just that," Jordan Rochester, a foreign-exchange strategist at Nomura International, wrote in a note to clients.

"For the market, the worst outcome is if we have further uncertainty with the chances of a hung parliament."

The latest polls presage what could be a rocky spell for sterling, with the June 8 election coming against a backdrop of a slowing economy and increased security risks.

A measure of two-week implied volatility for the pound against the dollar increased more than two percentage points on Friday, the biggest jump since October's flash crash.

While the measure climbed to 9pc, the highest level since April, it's still well below the more-than 40pc level reached before the Brexit vote.

Data last week showed UK growth in the first quarter was slower than first thought, and consumer confidence has also fallen to its lowest since the Brexit vote. At the same time, the threat level posed by terrorism to the UK has been raised to "critical" from "severe" following the Manchester bombing. But it is the tightening opinion polls that have focused market traders.

The poll "certainly has the potential to prompt some further pound selling over the short-term", said Derek Halpenny, European head of global markets research."

"The consensus of a clear victory for PM May has been very strong and that in itself might be enough for further weakness over the short-term," he said.

(Additional reporting by Bloomberg)

Irish Independent

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