The U.K. elections are getting tighter, which could mean a nervy couple of weeks for pound traders.

Sterling dropped Friday, rounding off the worst week this year, as a poll showed Theresa May’s Conservative Party leading the main opposition Labour Party by just five points, a gap that even this month had been as high as 24 points in some surveys. That left investors questioning whether the Prime Minister would achieve the increased majority that had been baked into the pound for the past few weeks.

If the result of the poll is uniformly spread nationwide, it could mean the Tories end up with a smaller majority than in 2015, according to the Times, a result which analysts say could spell more losses for a currency that was buffeted by the Brexit vote in 2016.

“If there is one thing markets do not like it’s uncertainty and for the next two weeks the election looks to be providing just that,” Jordan Rochester, a foreign-exchange strategist at Nomura International, wrote in a note to clients. The latest poll “shows the Tory lead narrowing to just five percent, which is the key level of when Theresa May’s majority starts to be put into question.”

The pound was at $1.2786 as of 4:30 p.m. in London on Friday, on course for a 1.9 percent weekly decline, the biggest since November.

The latest polls presage what could be a rocky spell for sterling, with the June 8 election coming against a backdrop of a slowing economy and increased security risks.

A measure of two-week implied volatility for the pound against the dollar increased more than 2 percentage points on Friday, the biggest jump since October’s flash crash. While the measure climbed to 9 percent, the highest level since April, it’s still well below the more-than 40 percent level reached before the Brexit vote.

Data last week showed growth in the first quarter was slower than first thought while consumer confidence has also fallen to its lowest since the Brexit vote, according to an index compiled by YouGov and the Centre for Economics and Business Research. At the same time, the threat level posed by terrorism to the U.K. has been raised to “critical” from “severe” following the Manchester bombing.

Source:
courtesy of BLOOMBERG

by JOHN AINGER

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