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Is the pound headed for election volatility?

Is sterling heading for election volatility?
A YouGov poll on Friday, which dented sterling after it revealed a narrowing in the lead of the Conservative party, is a foretaste of how nervous the market is likely to feel as the June 8 vote nears.

This is the last full week of the campaign and polls are likely to be more frequent than in previous weeks, so the pound could zigzag as it tracks voting patterns. Polls announced this weekend mean that Tuesday morning trading (there are public holidays on Monday in the UK and the US) will set the tone. Expect a sterling bounce if the Tory lead widens again.

Still, investors may reassess their sterling outlook in general. They rallied behind the currency when Prime Minister Theresa May called the election, partly because they believed a beefed-up parliamentary majority would enhance her Brexit negotiating hand.

If the polls suggest the Tories will not do as well as expected, investors may deliver their judgment on Mrs May by selling the pound.

What’s going on with bitcoin?
In two days last week the price of bitcoin soared towards $2,800, crashed back to $2,222 then rebounded to $2,600, having been valued in the $1,220s as recently as April. Those invested in the crypto currency will say the price action reflects the fact that bitcoin has finally arrived, breaking out from use by the tech set and black economy entrepreneurs.

However, there are other less convenient factors behind the rise, which imply something more technical and disruptive may be at hand.

Bitfinex, bitcoin’s most active and prominent exchange, is yet to regain the capacity to wire dollars abroad having lost access to the US correspondent bank network. Rival exchange Coinbase has been experiencing service interruptions in the past two days, preventing many customers from either taking part in the rally or profiting from it.

Settlement capacity constraints have propelled transaction fees to unprecedented levels of as much as $3 a transaction. Buttressing the whole thing, meanwhile, has been speculative fervour in initial coin offerings, which demand would-be investors acquire bitcoin to purchase tokens in blockchain-based ventures.

Time to follow the feel good flows?
According to Bank of America Merrill Lynch, more than 40 per cent of the European fixed income market still offers a yield below zero, meaning a buyer accepts a loss as the price of knowing they will get their money back. A strange state now commonplace, it reflects the ongoing large stimulus measures of the European Central Bank.

Yet the European economy is growing, along with that of most nations and regions of size, with the exception of Nigeria. The Federal Reserve is expected to raise interest rates next month, for the second time this year. Attention is starting to turn towards how and when the ECB tapers purchases running at €60bn a month.

For most of a decade inflows into bond funds have been associated with a desire for safety and reliability. Economic growth, however, means movement back towards the higher interest rates once considered normal, which are bad for the price of bonds offering a fixed income.

BofA highlights that money has flowed out of government bond funds for three weeks in a row, and in 14 out of 21 weeks so far this year. If investors start to feel good about the world, would the flow turn into a flood?

Reporting by Roger Blitz, Izabella Kaminska and Dan McCrum