FX Focus: Pound tumbles to two-month low as Tories' lead narrows

The pound hit a two-month low against the euro on Friday (26 May), after a new YouGov poll cut the Conservative Party's lead to just five points.

The survey, of more than 2,000 people between 24 and 25 May, put the Conservatives on 42% (-1) and Labour on 38% (+3). The five-point lead, if replicated on 8 June, would mean that the Tory overall majority in the House of Commons would fall from 17 to just two.

The slim majority would leave Theresa May wide-open to rebellions from Conservative backbenchers during the two-year-long divorce talks with the EU.

Sterling did not react well to the news, falling 0.72% against the euro to a two-month low of €1.1457 and was also 0.63% lower against the dollar, trading at $1.2858.

"Sterling is likely to continue to be under pressure now until the election is out of the way, if polling continues to indicate it's a tighter race," said Nomura analyst Jordan Rochester.

"For the market the worst outcome is if we have further uncertainty with the chances of a hung parliament."

Paresh Davdra of Rational FX added volatility was likely to last at least until the election.

"Whilst the pound has been able to remain steady in face of the week's tragic events and disappointing data, it is clear that the election is the most powerful driver behind the UK's currency," he said.

"The next two weeks could see more volatility for sterling as polling figures in the run up to the election become more frequent. Analysts will be looking for any definitive signs that the Conservatives can win the election before the pound can consistently return to the levels seen recently."

However, some analysts suggested the pound could soon recover some its losses once the novelty factor related to the latest poll wears off.

"Cable [the pound/dollar rate] has spent the week trying vainly to break $1.30, but the most recent YouGov poll has empowered the bears," said Chris Beauchahmp, chief market analyst at IG.

"Such a polling bounce for Labour was also eminently predictable - a similar occurrence took place for the Conservatives in the 1997 election, and we know how that turned out - so we should see some cable buying as the session goes on."

Elsewhere, the dollar was under pressure and relinquished most of the gains recorded in the previous session. Flat against the euro and the Australian dollar, the greenback was 0.80% and 0.29% lower against the yen and the Canadian dollar respectively, trading at ¥110.94 and CAD$1.3446.

The dollar has been on the back foot for the most of this week, with upside gains limited following May's Federal Reserve meeting minutes which was dished with a dovish undertone.

"With US economic data following a mixed pattern and [Donald] Trump uncertainty still a dominant theme, there is a layer of uncertainty over the longer-term hiking path," said FXTM research analyst Lukman Otunuga.

"As the Federal Reserve is set to maintain a defensive stance until the US economy displays signs of stability, there will be an increasing focus on hard economic data."