UPDATE 3-Sterling falls slightly with traders still hopeful of Conservative majority

Sterling edged down on Tuesday but remained near a six-month high versus the euro on the back of a new poll reinforcing investors' expectations the ruling Conservative Party will win a parliamentary majority in Britain's election next month. Prime Minister Boris Johnson's Conservatives have surged to an 18-point lead over the opposition Labour Party, according to an opinion poll published by market research company Kantar on Tuesday.

If the Conservatives win a majority on Dec. 12, expectations are the House of Commons would approve the Brexit deal agreed with Brussels last month and Britain would exit the European Union on Jan. 31, ending three-and-a-half years of uncertainty. Brexit Party leader Nigel Farage said on Tuesday that the Conservatives would probably win the election with a small majority.

Much of the expectations of a Johnson win are already priced into the pound, HSBC strategists told Reuters. "While sterling definitely looks cheap, the Johnson majority is 70% priced in after this weekend’s polls and the pound is unchanged over the past month," HSBC strategists said. The right question, they said, was not whether sterling would jump in the next two months, but by how much.

The same view was shared by ING strategists, who did not expect the pound to strengthen beyond 85 pence per euro on Tuesday, even if Johnson wins the first televised debate with opposition Labour Party leader Jeremy Corbyn later in the day. By 1635 GMT, sterling had shed 0.22% of its value versus the euro to trade at 85.68 pence, still close to the six-month high of 85.22 pence reached on Monday. It also fell by 0.13% against the dollar to $1.2934.

Sterling has climbed from $1.20 early in September to near $1.30 on Monday as hedge funds reduced their short positions on the currency. One-month implied volatility gauges for a sterling show, however, that investors remain nervous about the outcome of the election.

Options prices are at their highest since mid-October and have nearly doubled in value since the beginning of the month. This essentially shows that demand for protection against sterling volatility has climbed, implying severe currency moves around election time. Moreover, even if Britain exits the EU at the end of January, Johnson would still be expected to negotiate a trade deal with the bloc during next year's transitional period.

"The election will therefore not bring the certainty as claimed," said Stefan Koopman, senior market economist at Rabobank. "It is expected to take much, much longer than the remaining 11 months to negotiate a comprehensive free trade agreement," he said.

 

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