LONDON -- The pound declined after a projection showing Theresa May’s Conservative Party may fall short of majority in next week’s election raised the spectre of a hung parliament.
The British currency weakened versus all its Group-of-10 peers as the currency bore the brunt of increasing market jitters before the vote. The YouGov Plc study in the Times, based on a new model, showed the prime minister’s party may fall short of an overall majority by 16 seats -- a contrast from just a few weeks ago when a solid Tory victory was seen as a foregone conclusion.
The currency’s drop “is another example of markets not being prepared for a close election, let alone a hung parliament”, said Sean Callow, a senior currency strategist at Westpac Banking Corp., the second most-accurate major currencies forecaster in Bloomberg’s latest ranking. “Speculative short positions have been unwound, leaving sterling looking for fresh direction. So speculators may reload short-pound positions if the election is indeed a lot closer than was implied by the sharp rally when the election was announced.”
Still, sterling’s slide was limited, with the drop was not enough to take the currency beyond Friday’s lows against the dollar. That comes as traders, who’ve been burnt in the past by the wavering reliability of polls, treated the latest survey with a degree of skepticism.
Polling Doubts
“We doubt that the Times/YouGov research is giving us the true picture about how many seats each party will win on June 8th,” Kathleen Brooks, EMEA Research Director at City Index, wrote in a note. “It is the outcome of a model that has used untested methodology to come up with this hung parliament conclusion.” While not completely discounting it, Brooks did say she would take this report “with a pinch of salt”.
While doubts over polling remain after a failure to predict the UK’s 2015 election result, the market has been shocked out of its pre-election complacency by mounting evidence that the race between May and Labour’s Jeremy Corbyn is getting tighter. Measures of expected volatility in sterling that cover the election are jumping this week, while last week’s drop against the dollar was the pound’s worst this year.
“Recently we’ve been relatively agnostic about sterling, but have now decided to underweight the currency for the next couple of weeks, in case the depreciation accelerates," Cosimo Marasciulo, head of European fixed-income at Pioneer Investments, said in emailed comments. Given the surprise outcomes of the 2015 election and last year’s European Union referendum “with recent polls showing a dramatic fall in the Conservatives’ lead, it’s no wonder that people are getting twitchy”.
The pound fell 0.5%to $1.28 as of 9.31am in London on Wednesday, after earlier touching $1.2788. That’s still above Friday low of $1.2776.
One beneficiary of the weaker pound is the FTSE 100 Index, whose members get more than two-thirds of their revenue from overseas. The index rose 0.2% on Wednesday, to within a few points of a record reached last week.