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Sterling falls as probability of hung Parliament grows

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The pound was sluggish on Monday as polls showed that the Conservative Party was leading albeit with a smaller advantage, increasing the probability that the Dec 12 UK election will end in a hung parliament.

[LONDON] The pound was sluggish on Monday as polls showed that the Conservative Party was leading albeit with a smaller advantage, increasing the probability that the Dec 12 UK election will end in a hung Parliament.

British Prime Minister Boris Johnson's Conservative Party has held its 7-point lead over the opposition Labour Party, according to an opinion poll by ICM for Reuters, the first to be conducted entirely after Friday's attack near London Bridge.

Earlier in the day, however, the Conservative (Tory) Party's lead over Labour had narrowed to 9 percentage points in the past week, a Survation poll for ITV's Good Morning Britain said on Monday.

"For me that's probably taken some shine off sterling," said Neil Jones, head of European hedge fund sales at Mizuho.

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Sterling was last down 0.1 per cent at US$1.2935. It was flat against the euro at 85.54 pence. The pound has recovered slightly since last week from around US$1.28 and 85 pence per euro.

Option prices showed that investors have been preparing for unexpected moves in the British currency during the election. Implied volatility gauges have risen to 13.7 vol, the highest in six weeks. Volatility across other major currency pairs was near record lows.

Speculators still held net short positions on the pound in the week to Nov 19 of US$2.58 billion, latest CFTC data showed, though volumes were relatively low for this year.

A Conservative majority in Parliament would make it easier for Mr Johnson to pass the Brexit deal agreed with the European Union in October, restoring some certainty to the UK's exit from the EU, analysts say. This conviction has pushed the pound higher in the past two weeks as polls pointed to a higher probability of a Tory majority.

"There are increasing parallels with the way polls played out in 2017 with what we're seeing now, so that could cap the upside for sterling," said Jeremy Stretch, currency analyst at CIBC.

REUTERS