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[LONDON] The UK election just got interesting for pound traders.
Sterling tumbled Friday, putting it on course for its worst week this year against the US dollar, as a poll showed the Conservative Party's lead over the main opposition Labour Party has narrowed to five percentage points. That came after weeks of surveys showing a bigger Tory lead had made the vote all but a foregone conclusion for the market. The tighter poll prompted a measure of expected volatility that covers the June 8 election to jump by the most since October's flash crash.
"We're potentially in the trouble zone," said Neil Jones, head of hedge-fund sales at Mizuho Bank.
"Sterling correlates well with anything that shows a Tory majority and vice versa, so if you've got this situation where the majority closes right down, it may come to a critical level where it may not have a sufficient number of seats in the house. The market doesn't like that."
The YouGov Plc poll feeds into a souring atmosphere for the pound with the UK terror threat remaining at "critical" levels following the Manchester attack and disappointing growth data for the economy Thursday. An index compiled by YouGov and the Centre for Economics and Business Research also indicated consumer confidence fell this month to its lowest since Brexit.
While the latest poll was conducted after the Manchester terror attack, the Tories' narrowing lead was more likely to have been caused by a row over an unpopular policy on elderly care, Anthony Wells, a research director at YouGov, told the Times newspaper. Most previous surveys had given Prime Minister Theresa May a lead about 10 points or above.
If the swing to Labour were uniform across the country, Mrs May would lose seats in the House of Commons, with the Tory majority falling to two from 17, the Times said. Such a result would trigger a further sell-off in the pound, according to analysts. Questions still hang over the accuracy of British polls, after surveys failed to predict a Tory majority before the 2015 election.
The pound fell 1.1 per cent to US$1.2798 as of 3.43pm in London, extending its weekly drop to 1.8 per cent, on course for the biggest this year.
A measure of two-week implied volatility for the pound against the dollar climbed more than two percentage points to touch 9 per cent, the highest level since April. Still, the measure remains well below the more-than 40 per cent level reached before the Brexit vote.
"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," Jordan Rochester, a foreign-exchange strategist at Nomura International, wrote in a note to clients.
"The worst outcome is if we have further uncertainty with the chances of a hung parliament"