Pound whips back as conflicting polls leave traders edgy

After an overnight opinion poll indicated the Conservative party's lead was likely to all but disappear, a later survey on voting intentions showed the Tory lead remained intact.

The pound had sunk 0.5% versus the dollar close to 1.277, after a YouGov poll published in The Times suggested Theresa May could fall short of a parliamentary majority in next week’s general election.

According to the poll, which looked at results on a constituency-by-constituency basis, the Conservatives could lose as many as 20 of the 330 seats they held in the last parliament, while Labour could gain nearly 30.

But sterling was lifted back to 1.284 after a Panelbase poll suggested the Conservative lead not only remained intact but had increased compared to two weeks ago, up to 15 points.

“A 15-point cushion is more what Theresa May and co would like and this seems to be reining in some of the bearish bets on the pound," said analyst Neil Wilson at ETX Capital.

"But it’s hard to be particularly bullish when we have this added political risk premium which looks set to persist until after the vote.

"We’re used to this ahead of elections. It was similar before the Brexit referendum and we should expect volatility when traders are basing decisions on pretty unreliable polling data and volumes are thin. It’s going to be pretty choppy for the next few days as the pound looks set to be buffeted by conflicting polling data."

Jordan Hiscott, chief trader at Ayondo Markets, stated the obvious in predicting that a hung parliament would see the pound fall hard against dollar.

But he added: “With the latest poll predicting unexpected gains for Labour, the possibility of a grey Swan event has increased dramatically – this term refers to a partially anticipated effect of a surprise outcome.

“As with all recent geopolitical events that have not resulted in the predicted outcome, the Tories failing to win a majority would likely cause an initial shock to all risk assets, especially those associated directly to the parent index of the country in question, in case the FTSE."

When the Prime Minister announced the snap general election, GBPUSD’s moved from 1.22 to 1.28 as it was expected that the Tories would not only win, but gain a large majority, potentially giving them a more dominant negotiating role when dealing with the EU, which could allow May to go for whichever 'hard' or 'soft' Brexit she felt best.

"Without this majority," said Hiscott, "the dual effect of the unexpected result and the government’s less clear view on negotiating with the EU over Brexit, would in my opinion see sterling quickly fall back to 1.2 – an even as far as the October 2016 low of 1.1755.”

YouGov out on a limb?

While it is true that the Conservatives’ lead in the polls has narrowed since the general election was called, the overnight prediction from YouGov that the party would fall short of a majority does seem to be an outlier, suggested Andrew Goodwin at Oxford Economics.

The various opinion polls currently offer a much wider spread of results compared to the 2015 election, implying a bigger degree of uncertainty around the final result, with the Conservative lead ranging from 6% from Survation and ORB to 15% with Ipsos MORI.

While attempts have been made to address the tendency for pollsters to underestimate the degree of support for the Conservatives and overstate the Labour vote, Goodwin pointed out that other polls and models continue to suggest that the Conservatives will increase their majority to around 100.

"We would view such an outcome as being positive for sterling as it would raise the chances of a Brexit deal being agreed."

He said with even the most pessimistic prognosis for the Conservatives giving them a 6% lead, similar to their margin of victory in 2015, "there is nothing in the national level polling data to suggest that the Conservatives risk losing seats".