|12 December, 2019

British pound slips as election gets underway

British pound stepped back from a near nine-month high on Thursday

LONDON- The British pound stepped back from a near nine-month high on Thursday as investors booked profits from a recent rally in case of a surprise UK election outcome later in the day.

Voters were heading to the polls in an election that will pave the way for Brexit under Prime Minister Boris Johnson or propel Britain towards another referendum that could ultimately reverse the decision to leave the European Union. 

Investors in the cash market have bet on a Conservative Party majority, bolstering the pound in recent days. Market watchers expect such an outcome to lift Brexit uncertainty 3-1/2 years after Britain voted to leave the European Union in shock referendum result.

A closely watched model from pollsters YouGov earlier this week put Prime Minister Boris Johnson on course to win a majority of 28 seats in parliament on Thursday, down from a forecast of 68 last month. But YouGov also said its model could not rule out a hung parliament, where no party gains a majority. 

While investors have largely been focussing on the short-term dynamics of the election, it is the final Brexit outcome and progress in subsequent trade negotiations which will determine the outlook for the pound over the medium term.

“The immediate price action in sterling will obviously be driven by the election outcome, but the magnitude of the majority will also be important," said Ugo Lancioni, head of global currency at Neuberger Berman.

The premium for pound put options over call options over the next week jumped to its highest since September 2016 at nearly 6% as investors sought to protect themselves from any fall in the value of the pound by buying derivative contracts. 

While cash markets were relatively quiet as investors moved to the sidelines, overnight implied volatility gauges jumped to 45%, their highest since around the Brexit referendum vote in June 2016 as investors braced for a rocky night.

"Turnover is low given the uncertainty going into the election," said Adam Cole, chief currency strategist at RBC Capital Markets.

In trading on Thursday, the pound was 0.2% lower at $1.3169 against the dollar and weakened 0.3% to 84.62 pence versus the euro. It hit a high of $1.3229 in early Asian trading, its highest since late March.

(Reporting by Saikat Chatterjee; Additional reporting by Elizabeth Howcroft; Editing by Larry King, Kirsten Donovan) ((saikat.chatterjee@thomsonreuters.com; +44-20-7542-1713; Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))

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