Sterling knocked to two-week low on narrowing UK election polls

The pound has been knocked to a two-week low on the back of a narrowing in the polls ahead of the UK’s general election, which show the Labour party making ground on Theresa May’s Conservatives.

Sterling has slipped over 0.5 per cent against the dollar today to $1.2873 – putting it on course for its worst week since early April – in the aftermath of a YouGov poll which shows the Tories with just a five-point lead over the opposition Labour party.

In the first poll since the Manchester terror attack and Mrs May’s volte-face on elderly care spending, the Conservatives have slipped 1 point to 43 per cent while Jeremy Corbyn’s party gained 3 points to 38 per cent.

This translates to around a 26-seat majority and is the smallest gap since the Labour party elected Jeremy Corbyn in 2015.

The pound is also 0.64 per cent weaker against the euro, declining to a 11-week low.

Sterling had strengthened over 3 per cent against the dollar since prime minister May called a snap general election in April, as investors bet the Conservatives were heading for their biggest landslide victory since Margaret Thatcher’s triumph in 1979.

Polls last month pointed to a 20-point Conservative lead over Labour. Last week, US investment bank Citi said its base case scenario was a Tory majority of over 100 seats.

But the sharp narrowing to just a 5 percentage point gap marked the “key” threshold where markets will begin to doubt the probability of a Tory majority, said Jordan Rochester at Nomura.

“For the market the worst outcome is if we have further uncertainty with the chances of a hung parliament” he said.

Chris Turner, head of FX strategy at ING, noted that investors had taken a number of bets on sterling strengthening since the election was called.

“That rationale is now being questioned ahead of the 8 June vote”, said Mr Turner.