FX Focus: Pound tumbles amid fears of hung parliament

The pound sank on Wednesday (31 May), after a new poll showed Theresa May could be in danger of falling short of an overall majority in next week's General Election.

A YouGov survey for The Times, based on 50,000 interviews of voters from across the political and socio-economic spectrum, predicted the Tories could lose 20 seats and fall short of a majority by 16 seats.

The prospect of a hung parliament sent the pound tumbling to as low as $1.2791 in early trading, perilously close to the one-month low of $1.2775 touched at the end of last week. By 9am BST sterling had recouped some of the losses but remained 0.33% lower than yesterday's closing level, trading at $1.2815.

The UK currency was also on the back foot against the euro, falling 0.35% to €1.1452, meaning one euro is now worth 87.33p, compared to 76p before last June's EU referendum.

"The importance of politics as a market driver currently can't be overstated. Perhaps that shouldn't surprise anyone when the economic backdrop is relatively dull," said said Kit Juckes, head of forex at Societe Generale and IBTimes UK columnist.

"We're supposed to treat polls with suspicion but needless to say, we remain bullish on the euro/pound rate even if I've lost my bet that it would trade above 0.90p by the start of this week."

Neil Wilson, senior analyst at ETX Capital, said a hung parliament would be the nightmare scenario for the Prime Minister, as it would constitute a "massive personal failure" and undoubtedly make for great domestic political uncertainty at the worst possible moment for Britain.

"If May fails to get the thumping majority she hopes for, her position will be a lot less secure than before she called the snap election," he said.

"May has made this campaign particularly personal and a failure to secure a large swathe of new Tory MPs would be seen a failure of hers. This risks throwing open a Tory leadership contest and the prospect of a hard-line Brexiteer in charge. Boris Johnson is waiting in the wings."

However, some in the City remained less convinced about the possibility of the Conservatives losing seats next week and suggested the poll had to be taken with the proverbial pinch of salt. Kathleen Brooks, research director at City Index, suggested the poll's methodology was too untested to be relied upon when making such bold claims, though she conceded even a small majority could hurt the pound.

"We think there is a chance of a deeper sell off back towards $1.20 if it looks like Theresa May won't have a big enough mandate to agree a trade deal with the UK," she said.

"The prospect of no deal from the Brexit negotiations has spooked investors and may continue to do so after this election. This could weigh on sterling and the broader FTSE 350 index."

Elsewhere, the euro slid 0.11% against the dollar, trading at $1.1174. The latter, meanwhile, was broadly unchanged against its main rivals with the exception of the Australian dollar, against which it gained 0.11% to AUD1.3423.