A series of conflicting general election opinion polls led to a day of volatile trading on the foreign exchange market during which the pound slumped to a six-week low before recovering all of the lost ground and more.
The FTSE 100 initially shrugged off any political worries to hit another new all-time high, although the late rebound in sterling pushed it into the red by the close.
A YouGov poll predicting a hung parliament set the ball rolling, sending the pound as low as $1.2767 against the dollar in early trading, its worst level in six weeks. The poll, published in the Times on Wednesday morning, suggested that the Conservatives could be left 16 seats short of an overall majority.
But a later survey from Panelbase gave the party a 15-point lead, putting it on 48% compared with Labour’s 33%, while a subsequent poll from Kantar put the lead at 10 points, up from eight points a week ago.
So from its lows, the pound recovered to show a gain of 0.31% to $1.2900, while against the euro it was down just 0.08% at €1.1482, after earlier falling as low as €1.1428. James Andrews, head of investment management at Redmayne-Bentley, said he expected further volatility in the run-up to the election and as Brexit negotiations stepped up.
He said: “Given the prolonged uncertainty ahead of us, not to mention this short-term election-driven uncertainty, it seems any relief rallies will be just that, and the pound will find it difficult to sustain any upward momentum. In addition, further rate rises in the US and stronger fundamentals from the European economy will likely see strengthening of the euro and the dollar, providing further headwinds for sterling going forward.”
The early slide in sterling gave a lift to the FTSE 100, with its overseas earners such as Burberry and Diageo benefiting from a weaker pound. The index climbed to a new peak of 7586, beating the 7554 reached on Friday, but it fell back to close at 7519.95, down 0.09%, as the pound reversed course.
But the index did record its best monthly performance since December, up 4.46% in May, helped by the UK currency’s recent weakness and some signs of recovery in the global economy. The latest positive trends showed UK consumer confidence edging higher in May, while in the eurozone, unemployment was at its lowest level since March 2009.
With more polls due in the run-up to the election, markets could be unnerved by any signs of the Conservatives winning only a small majority, said Kathleen Brooks of City Index. “We think there is a chance of a deeper sell-off back towards $1.20 if it looks like Theresa May won’t have a big enough mandate to agree a trade deal with the UK. The prospect of no deal from the Brexit negotiations has spooked investors and may continue to do so after this election. This could weigh on sterling and the broader FTSE 350 index.”
