FX Focus: Pound gains ground as market bets on Conservative victory

The pound gained ground in the final day of campaigning before as investors bet on Conservative Party leader Theresa May to be re-elected as Prime Minister by Friday (9 June) morning.

Having been largely subdued in early trading, sterling advanced throughout the day and by mid-afternoon it was 0.17% and 0.55% higher against the dollar and the euro respectively, trading at $1.2933 and €1.1513.

While the polls have narrowed in recent weeks, the Conservatives remain clear favourites to be the ruling party for the next five years, with a weighted average of recent UK national polls showing the Tories retain a 43% to 37% lead over Labour.

"As campaigning reaches its climax, the pound has retreated slightly from the two-week highs seen yesterday but remains stable, as analysts await the election results," said Rational FX's Paresh Davdra.

"The markets are positive about the prospects of Prime Minster Theresa May emerging the winner of tomorrow's vote, as current polls indicate a secure lead for the Conservatives.

"However, there is still caution over the remote possibility of a hung parliament or a Labour victory, which investors fear would sink the pound in the aftermath of the election."

FXTM research analyst Lukman Otunuga added: "While a scenario where Theresa May secures victory in the UK General Election could support the pound, the upside could still face some headwinds against ongoing Brexit uncertainty.

"From a technical standpoint [...] a hung parliament situation could expose sterling to extreme downside risks with $1.2600 acting as the first checkpoint."

Elsewhere, the euro slid to a four-day low amid reports the European Central Banking could be ready to cut its inflation forecasts.

"Should this be the case, it would support the need for monetary policy to remain very accommodating and either delay tapering or at least slow the pace of it," said Oanda's senior analyst and IBTimes UK columnist Craig Erlam.

"The dovish nature of this has hit the euro sending it back towards $1.12 against the dollar and below 0.87p against the pound. Should this be rejected, I would expect the moves to quickly reverse."

The common currency was 0.40% and 0.19% lower against the dollar and against the yen, trading at $1.1232 and ¥123.14 respectively.

Meanwhile, the dollar edged higher against most of its rivals, recovering from the seven-month low it hit in the previous session.

Aside from gaining against the euro, the greenback was 0.16% and 0.36% higher against the yen and the Swiss franc respectively, trading at ¥109.58 and CHF0.9656. However, the US currency slid 0.62% against its Australian counterpart to AUD$1.3229.