Sterling edged up to its highest level in a week after a poll showed Boris Johnson’s Tory party could storm to its strongest election victory since Margaret Thatcher more than three decades ago.
The modest rally marks a shift in tone for the currency markets; In recent months, the pound has at times reacted positively to gains by Jeremy Corbyn, with investors betting that despite his market-unfriendly policies, the opposition leader at one point seemed to offer the clearest path away from leaving the EU without a deal.
Now, Conservative gains are linked more closely to strength in the pound. The currency hit a peak of $1.2950 in late New York trading on Wednesday as investors reacted to the YouGov poll. It gave up those gains in London, but analysts said the initial jolt higher highlighted how market sentiment had switched.
Antje Praefcke, an analyst at Commerzbank, said: “A result like [the one forecast by the poll] in two weeks’ time would mean that Boris Johnson would be able to get his Brexit agreement through parliament at the end of January and would be able to start the negotiations on future EU relations following the exit.
“Even if this would cast the exit of the UK out of the EU in stone it would at least end the uncertainty about it that dominated the past months and years.”
The UK currency has inched up and down throughout the election campaign that began in early November as traders have attempted to divine what various outcomes would imply for Brexit and the economy more broadly.
Mr Johnson’s Tories have led in opinion polling ever since the campaign kicked off. But investors have closely scrutinised the latest YouGov poll, based on a sample of 100,000 people, because it was the only one to correctly predict a hung parliament in 2017.
A Conservative majority is seen by many analysts as a bullish outcome for the pound since it would herald more certainty — at least in the short term — over the path for Brexit. Traders worry that an indecisive result or a Labour win would present fresh hurdles to the passage of legislation to allow the UK to exit the EU with a transition agreement in place.
Derek Halpenny, head of research for global markets at MUFG in London, said: “Corbyn has had a bad campaign and while there is still scope for the gap to narrow, it is now looking increasingly likely that time is running out or has run out for Labour to make a surge.”
The pound has rallied 8 per cent since striking a trough below $1.20 against the US dollar in August, leaving it as the best-performing major currency over the past three months. Analysts and investors have said the rise has come due to a reduction of concerns over a potentially chaotic no-deal Brexit that dominated the headlines this summer.
Despite the recent rise the pound is, in effect, flat for 2019. The December 12 election will set its tone for the coming weeks and months. Goldman Sachs, for instance, forecast last week that the pound might rise to $1.35 if the Tories secure a majority since it would speed up the Brexit process.