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Expectations of Conservative win in UK election extend pound's rally

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By Reuters
Expectations of Conservative win in UK election extend pound's rally
FILE PHOTO: An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration   -   Copyright  Phil Noble(Reuters)
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By Olga Cotaga and Dhara Ranasinghe

LONDON (Reuters) – Sterling hit a seven-month high against the dollar and a 2-1/2 year peak versus the euro on Monday after fresh polls showed British Prime Minister Boris Johnson’s Conservative Party has extended its lead in opinion polls before Thursday’s election.

The ruling Conservatives extended their lead over the main opposition Labour Party to 14 percentage points, up from 9 percentage points a week ago, an opinion poll by Survation for ITV’s Good Morning Britain showed on Monday.

Sterling rose to as high as $1.3180 <GBP=D3>, its highest level in seven months, and was last up 0.2% on the day.

The pound strengthened versus the euro to 83.94 pence <EURGBP=D3>, its strongest level in 2-1/2 years.

The British currency rose as implied volatility gauges for one week have fallen to their lowest in nearly two years, with investors, like UBS Wealth Management, offloading protection against unexpected moves in the pound, pushing the price for options lower. <GBPSW=>

Graphic – Sterling 1-week volatility falls to lowest since Jan. 2018:

The expectations that the Conservatives will win an outright majority has boosted the pound in recent days as investors see this leading to parliament approving a Brexit deal Johnson has secured with the EU, ending three and a half years of political paralysis.

But sterling gains hereafter are likely to be limited, given that Britain will have to negotiate a new trade deal with the European Union after formally exiting the bloc on Jan. 31. The time allocated for this is less than a year, which analysts say is an impossible task.

UK officials have also questioned whether Johnson’s claim that Britain will make a clean break with the EU in December 2020 can be achieved, fearing that a new customs arrangement for Northern Ireland may not be ready in time, the Financial Times reported.

This “points towards the likely need for an extension to the transition period beyond the end of next year, something Boris Johnson has pledged not to request,” said Lee Hardman, currency analyst at MUFG, adding that “it leaves open the risk of a no-deal Brexit towards the end of next year”.

“Once the initial euphoria fades over a positive UK election outcome, it will become more challenging for the pound to extend its advance in 2020,” he said.

(Reporting by Olga Cotaga and Dhara Ranasinghe; Editing by Gareth Jones)