Further large gains for sterling are unlikely after the currency rallied on a poll showing Boris Johnson securing a large majority in the UK election on December 12, a leading economics consultancy has said.
A majority, estimated at 68 seats under the model developed by pollsters YouGov, would give Mr Johnson a mandate to get the transition divorce deal negotiated with Brussels passed by Westminster.
Odds on a Conservative majority on the Betfair Exchange hit 70%, their highest this year following the poll and sterling rose to $1.295 — its highest since November 21. It traded at 85.25 against the euro.
However, Capital Economics in London said that sterling could rise a bit more but that Brexit will continue to weigh on the currency.
“Despite the growing likelihood of a Conservative majority, sterling has only edged higher in recent weeks. We think that the pound could rise further if the party win a majority, but that its stance on Brexit limits the upside for now,” the consultancy said.
“But more importantly, even a Conservative majority might not completely put the issue of Brexit to bed. The prime minister’s current deal makes a no-deal Brexit in the coming months far less likely, but there remains a significant risk of something like it at the end of next year if the Conservatives refuse to extend the Brexit transition period that is due to end next December,” it said.
Mr Johnson has pledged to take Britain out of the EU in January but that does not remove all the uncertainty pressuring the UK economy as it merely fires the starting gun for potentially protracted negotiations on a future free trade deal between Britain and the EU.
Demand for put options to sell the pound in the future now outstrips demand for call options to buy sterling, and this is reflected in the put premium contained in one-month so-called risk reversals that straddle the election date.
The pound headed for a fourth month of gains against the euro, reflecting growing confidence in the market that the Conservative Party will be able to secure a majority in the UK’s December election.
“We expect the currency to remain supported given the credibility of the YouGov MRP poll and especially given the considerable lead that it gives to the Conservatives,” wrote Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole in a research note.
“This could mean that, even taking into account the inevitable polling errors, the Tory party should be still able to gain a comfortable majority,” he said.
The pound pared gains after touching a six-month high against the euro.
It was heading for monthly gains of 1.2%, in the longest winning streak against the euro since 2015.
Sterling has been tracking opinion polls closely ahead of the election, and had slipped earlier in the week as surveys of voter intention suggested the Conservative lead was narrowing.
Markets prefer the certainty offered by a majority government, according to a recent Bloomberg survey.
Stock markets in Europe fell back as investors stayed on the sidelines due to the US Thanksgiving holiday.
“Without the US, markets have lacked a spark, and instead small losses have been the order of the day. It is always hard to draw any real conclusions about risk appetite on such days, but oil prices have drifted lower, a useful proxy for how markets have viewed the signing of the Hong Kong bill in the US,” said online broker IG.
Additional reporting, Reuters and Bloomberg