Sterling traders kept their powder dry ahead of Thursday’s UK election, avoiding the temptation to anticipate an outcome muddied by volatile opinion polls and preferring to keep the pound in a tight range.
After last week’s surprise narrowing in the polls, which pushed the pound to the sub-$1.28 levels that prevailed when Theresa May, prime minister, called the election, sterling has regained some composure and is back above $1.29.
The pound traded marginally higher against the dollar on Wednesday but did climb against the euro, up by 0.6 per cent to €1.1515 ahead of Thursday’s European Central Bank meeting, amid reports that policymakers are preparing to cut inflation forecasts.
Investors nonetheless remained cautious about the outcome and protected themselves against a post-election fall in sterling.
The narrowing polls pushed sterling-dollar one-week risk reversal trades, which monitor investor demand for put options over call options, to its most bearish since Brexit, and on Wednesday it remained heavily negative, at nearly minus 4 per cent.
The bond market reflected the mood of caution, with UK 10-year gilts hovering around 1 per cent.
Analysts foresaw a range of election scenarios that could influence the pound, from a Labour-led coalition to a Conservative landslide.
Kamal Sharma at Bank of America Merrill Lynch said the former would be positive for sterling. raising the likelihood of a soft Brexit, while the latter, though initially bullish was “no guarantee for subsequent strong performance”.
ING predicted a low of $1.24 in the event of a hung parliament, and a high of $1.32 if Mrs May won a 100-plus majority, but Kit Juckes at Société Générale cautioned against a sharp sterling fall.
The backdrop to all the election permutations, he said, “is that the pound is cheap”.
According to Derek Halpenny of MUFG, the Conservatives tend to do better in elections than final opinion polls suggest.
Assuming a Conservative majority of 50, investors should give sterling a relief rally and take it above $1.30, Mr Halpenny said. But, he added: “Positioning though is now very different to six weeks ago and argues against any significant bounce for the pound.”