UK election now 'the biggest event risk' for FX markets - Citi

The UK election having become "the biggest event risk for FX markets in the space of a week", said Citi currency strategists on Monday.

Two weeks ago, the consensus was for the Conservatives to win a majority close to 100 seats in the House of Commons and when polls put Conservatives 15-20% ahead this was even greater.

"The narrowing of the polls more recently however, and weakness in GBP, suggests the expected majority has fallen," said Citi forex strategist Josh O'Byrne.

"We think consensus is closer to 50-75. This roughly corresponds with what betting markets are pricing."

A weaker Conservative showing than 2015, which would before the Labour surge in the last two weeks be a big surprise given initial polling gaps and the expectation that UKIP voters would move to Conservative, would "considerably complicate Brexit negotiations" and be the most negative scenario in Citi's view.

But if Labour's fightback leads to a small largely unchanged or even just slightly larger majority, this "would be a big blow to Theresa May but may still not totally derail Brexit negotiations", O'Byrne said, suggesting this scenario makes bigger changes in the cabinet less likely but would be negative for the pound.