FX Focus: Pound gains ground as new poll puts Tories 11 points ahead of Labour

The pound edged slightly higher on Monday (5 June), after a new poll showed the Conservative Party held a double-digit lead ahead of Thursday's General Election, but trading volumes remained thin.

Having climbed above $1.29 in early trading, by mid-afternoon sterling was 0.2% and 0.44% higher against the dollar and the euro respectively, trading at $1.2896 and €1.1477.

With Britain going to the polls on Thursday, politics remains the main item on the agenda for investors and the pound was boosted by a Guardian/ISM survey which showed the Conservatives with an 11-point lead ahead of the vote.

The poll eased fears of a hung parliament, which had emerged last week and which could potentially spell trouble for the British currency.

"What was really fascinating was what prompted the rebound [in the pound]," said Spreadex financial analyst Connor Campbell.

"Though YouGov's most recent survey suggests that the Tories will fall 21 seats short of an overall majority, investors instead appeared to focus on the latest Guardian/ISM poll giving the Conservatives an 11 point lead over Labour."

However, political jitters continued to make their presence felt in the UK economy, as growth in the services sector fell to a three-month low of 53.8 last month from 55.8 in April, the highest level on record this year.

Elsewhere, the euro was on the back foot against the dollar and the yen, falling 0.35% and 0.18% respectively, to trade at $1.1240 and ¥124.39.

That came despite a report showing the eurozone continued to grow at the fastest pace since the financial crisis last month. Markit's composite PMI, which tracks activity at service sector and manufacturing firms, stood at 56.8 for May, unchanged from the previous month's reading and in line with expectations.

While the UK election is likely to be a dominant theme for markets this week, investors will also focus on the European Central Bank meeting, which is also due to take place on Thursday.

"There has been a lot of speculation about how and when the central bank will withdraw its stimulus, with some suggesting they may hint at further reductions either this week or in September," said Oanda senior market analyst Craig Erlam.

"The economy is undoubtedly on a positive trajectory but as the PMI reports showed it is still unbalanced with Germany being a significant driver of it."

Aside from gaining against the euro, the dollar was also 0.24% and 0.3% against the yen and the Swiss franc respectively, trading at ¥110.67 and CHF0.9660. However, the greenback fell 0.37% against the Australian dollar, fetching A$1.3385 and was flat against its Canadian counterpart.

Away from the UK elections, US investors will focus on former FBI Director James Comey's testimony before Congress on Thursday.

Fawad Razaqzada, market analyst at Forex.com, explained the political impact of Comey's testimony could reverberate onto the FX market.

"If he comes up with evidence that Donald Trump pressured him to close the investigation on the national security adviser, Michael Flynn, then hell could break loose in the US," he said.

"Thus, given the potential for sharp moves in the likes of the GBP/USD and EUR/USD, and possibly the USD/JPY, the Dollar Index could be in for a rollercoaster ride, especially as we also have the Fed meeting next week to take into account as well."