FX round-up: Sterling up as markets await outcome of UK election

Sterling checked out of Wednesday on an overall positive note, but its performance over the rest of the week remains inherently linked to the outcome of the UK general election.

Much would hinge on whether the Tories or Labour won the ballot, or whether the outcome was a hung parliament. Polls have given the Tories a sliding lead over Labour in recent weeks.

At 17:03 BST, sterling was up 0.22% to $1.2940, while it rose 0.58% to €1.1514. The British currency also rose on the loonie, kiwi, rand and yen, but dropped on the aussie.

"The (GBPUSD) currency pair is likely to stay in a tight trading range on the run up to the election results," said David Madden, market analyst at CMC Markets UK.

"The GBPUSD has made up for lost ground in the afternoon session. [...] The sliding lead that the Tories have over the opposition in the polls has kept the pound under the cosh."

Connor Campbell, financial analyst at Spreadex, was uncertain about the reason for sterling's rise on the dollar and euro, which suggested an easing in election jitters.

"There are potentially other explanations for its growth. The euro has been hit by reports that the ECB is preparing to cut its inflation forecasts, something that would further kick the rate hike can down the road," said Campbell.

"In the US, meanwhile, the dollar is gearing up for tomorrow's testimony from former FBI chief James Comey, an event that could destabilise an already shaky White House."

To these opinions, James Trescothick, senior global strategist at easyMarkets, pondered some potential different outcomes when Britain had finished its vote.

He reckoned a Tory victory with less than a 20 seat majority would see sterling flogged lower, whereas a win with a 50-plus seat majority could see a far more positive impact on sterling.

"If (in another potential outcome) Labour did indeed win you might see the sterling come under a lot of pressure falling as low as $1.20 against the US dollar, due to the fact that (Labour leader Jeremy) Corbyn is not seen as a strong opposition for the EU," said Trescothick.

A hung parliament could produce total chaos in the market. "Sterling is likely to crash on this outcome," said Trescothick.

"With this result securing any deal with the EU will prove to be very difficult as any set direction for negotiations will be lost amongst all the bickering that will very likely occur between all the parties in the commons."

Meanwhile, the dollar-spot index was up 0.19% to $96.821, with the greenback itself ahead on the euro, loonie, rand and yen, but down on the aussie and kiwi.

Jasper Lawler, senior market analyst at London Capital Group, said with the dollar hovering near its lowest since the election of Donald Trump and the pound grinding to a halt before the election, FX movement was minimal.

"The euro was the stand-out exception. Reports suggesting the ECB is ready to cut its inflation forecasts for 2019 sent the euro to a four-day low until the denial of said reports sent it right back up again," said Lawler.

"The ECB lowering its inflation targets to us is akin to doubling down on an original bluff in poker.

"We think the ECB is delaying a necessary tapering announcement. The ECB is hoping the market doesn’t call its bluff before December when the QE program is officially scheduled to end."