FX Focus: Election rally drives pound close to four-month high against the euro

The pound remained firmly on the front foot on Wednesday (19 April), holding onto the gains secured in the previous session, when Prime Minister Theresa May surprisingly announced a snap General Election for 8 June.

Following May's announcement, sterling breached the $1.29 threshold for the first time in six months, before retreating marginally. By early afternoon, the UK currency was broadly unchanged against the dollar, trading at $1.2849, having gained 2.5% on the greenback so far this week.

Sterling was also on the front foot against the euro, trading at €1.1976 and approaching the €1.20 barrier for the first time in four months.

Chris Saint, senior analyst at Hargreaves Lansdown, explained the pound's new-found stemmed from investors' expecting a comfortable victory for the Conservative Party.

"Markets [are[ betting that the current opinion polls will translate into a landslide victory for Theresa May which will put her in a stronger position to negotiate a successful Brexit deal," he said.

The latest polls suggest the Tories will heavily extend their majority in the House of Commons at the 8 June snap general election.

All of the major polling firms put the party squarely ahead of the Labour Party – the UK's main opposition force – in the minds of the public. The lowest lead given to the Conservatives comes from Opinium but is still a significant nine points, while ComRes puts them 21 points ahead of Labour nationally.

However, FXTM research analyst Lukman Otunuga warned there was no guarantee the pound's rally would last.

"Questions should be raised over the sustainability of the current sterling rally, especially when considering how political uncertainties and Brexit woes remain current," he said.

"Investors are still pondering over the economic future of the United Kingdom after Brexit, with questions still being raised about whether the two-year timeframe will be enough to secure a deal."

Elsewhere, the euro was broadly flat against the dollar, exchanging hands at $1.0722 as markets drew breath ahead of Sunday's first round of the French presidential election.

Meanwhile, on the other side of the Pond, the dollar recouped part of the losses it suffered in the previous session, when it tumbled to a three-week low.

The greenback was 0.41% and 0.52% higher against the yen and the Australian dollar, trading at ¥108.87 and AUD$1.3301 respectively and gained 0.43% against the Canadian dollar to trade at CAD$1.3437.

"Ultimately we think the [dollar] rally can resume as markets start to focus on stronger US growth driven by capital expenditure which could drive inflation higher," analysts at Morgan Stanley said.