Pound rises against euro on expected Tory win

London

STERLING hit two-and-a-half-year highs versus the euro on Thursday, on growing confidence that next week's election will give the Conservative Party the parliamentary majority that it needs to deliver Brexit, ending near-term uncertainty.

Recent opinion polls suggest that the ruling Conservatives will win an outright majority in the Dec 12 election, removing some of the political uncertainty that has weighed on the currency for the last three-and-a-half years.

Prime Minister Boris Johnson called the vote to break an impasse in Parliament over Brexit. A majority in Parliament for his Conservative Party should allow him to get his withdrawal agreement passed by lawmakers and take Britain out of the EU by the Jan 31 deadline.

"The broad trend in the polls is not really changing now, and the Conservative lead on my poll of polls is about 11 percentage points - which is reasonably sufficient to get them a reasonably decent majority," said Adam Cole, chief currency strategist at RBC Capital Markets in London. "With only a week to run to the election, if the trend in the polls stays flat, then sterling probably keeps going up."

Sterling rose 0.3 per cent against the euro to 84.31 pence (S$1.51), its strongest level since May 2017. It has gained almost 10 per cent from lows hit in August versus the common currency.

The pound also rose 0.3 per cent to as high as US$1.3146, taking its gains since October to more than 7 per cent.

Analysts said the breaching of key technical levels on Wednesday around US$1.30 and 85 pence per euro had accelerated the pound's gains and encouraged traders to cover their short sterling positions.

"Upward momentum for the pound was also reinforced by euro/sterling breaking below key technical support from the March lows at 84.73 (pence)," analysts at MUFG told clients. "It has seen euro/sterling fall to its lowest level since May 2017. The positive technical developments have encouraged expectations that pound gains will extend further in the near term."

The latest Reuters poll also suggested that investor sentiment towards one of the most battered major currencies in recent years was turning.

Almost all foreign exchange strategists surveyed by Reuters were reasonably or very confident that Britain would leave the EU with a deal. The poll of nearly 60 foreign exchange strategists found that sterling would rise to US$1.33 in six months and another 3 per cent in a year at US$1.35.

That compares with a US$1.32 forecast made a month ago. In one sign of near-term caution, one-week implied volatility on sterling - a contract straddling the election - rose to its highest since late October. REUTERS