Sterling took a hit overnight after the latest YouGov poll showed that the Conservatives could now fall short of an overall majority (by 16-seats) in next week’s election.
The Pound had rallied heavily after the announcement of a snap election last month, as Prime Minister May was expected to commandeer a large majority in Parliament. Traders felt this would give her more power over the Brexit negotiations and therefore increased the chance of achieving a better deal (and softer Brexit). As the campaigns have moved forward, however, the polls have shown that the gap between the Tories and Labour has been diminishing. Until last night’s survey, the Tories still looked to have a healthy majority, but now it appears momentum has swung the other way and the odds of a hung parliament have increased.
No-one really anticipated a hung parliament and the prospect of one increases political uncertainty and therefore reduces the appeal of the Pound in the short term. Longer term, however, the jury is still out on what impact this would have on Sterling, as some traders feel that a hung parliament would eventually support the Pound, as some feel it would make a softer Brexit more probable. Still, a big question also remains as to how much we can actually trust these polls; YouGov indicators were famously a long way off in the last general election and EU referendum results.
The UK election is taking centre stage in the currency markets for now and the Pound is likely to swing according to which way the polls come in. I think traders will be reluctant to buy too heavily into Sterling at the moment (without a huge change in the polls towards the Tories) and are more likely to be skewed towards selling the Pound on any negative news versus buying on any positive news. This might change once the results start to come in towards the end of next week though as things become clearer.
As a result, the Pound has dipped back down to the lows we saw last Friday, with GBP/EUR around an 8-week low and GBP/USD close to a 5-week low. The next major figures we have are US employment numbers out on Friday afternoon.