Pound Sterling Powers to 7-Month Best vs. Dollar and Euro

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- Sterling bid in mid-week trade

- Odds of Conservative majority up to 70%

- Pound-to-Euro exchange rate @ 1.1818, up 0.80%

- Pound-to-Dollar exchange rate @ 1.3116, up 0.92%

Pound Sterling went sharply higher against the Euro, Dollar and other major currencies on Wednesday, December 04. as the odds of a Conservative majority being delivered in the December 03. General Election rose.

The implied odds of a Conservative majority rose back to 70% on the Betfair Exchange on Wednesday, having been at 66% 24 hours earlier: we have observed Sterling rise in sympathy with increasing odds of a Conservative majority since the start of the election campaign and note the current rally to be driven by this dynamic. Wednesday also saw Ladbrokes lengthen the odds of a hung parliament after December 12. to 9/4, thereby equalling the longest odds for a hung parliament quoted by any bookie through the election campaign so far

"The market continues to cut back on Sterling short portfolios & hedges in expectation of certainty derived from single party majority expectations. Indeed the latest polls indicates a further % move away from a hung parliament," says Neil Jones, Head of FX Sales, Financial Institutions at Mizuho Bank in London.

The odds of a Conservative majority appear to have been aided in part by the latest YouGov poll, out Tuesday, which showed that Labour had seen their support slip by a point over the course of the past week, suggesting they might have reached a high-water mark for the campaign. The gap between the Conservatives and Labour at YouGov stands at 9 points; if this is repeated in the election the Conservatives should walk away with a comfortable majority.

However, Labour have been steadily closing the gap on the Conservatives, and we would warn that it is too soon to suggest a high-water mark has been reached until further polling corroborates this view. Regardless, the market appears to be increasingly convinced of the outcome.

The Pound rallied to a new seven-month high against the Dollar when the GBP/USD hit 1.3116, a 0.92% gain on where it closed the previous day.

The Pound rallied to a new seven-month high against the Euro when GBP/EUR hit 1.1880, an advance of 0.80% on the day.

"The Pound is storming higher today due to expectations of a landslide Conservative victory in next week’s general election," says Phil McHugh, Chief Market Analyst at Currencies Direct. "Currency traders are becoming more confident in buying into an expected Conservative majority, which is helping the pound to push through key levels as they build their long GBP positions."

McHugh says the rally in Sterling is built on an assumption that a majority in Parliament will allow Boris Johnson to pass his EU withdrawal bill.

"There’s scope for Sterling to appreciate another leg higher if the election goes as expected, with analysts predicting short-term gains of up to 5% as markets are granted more clarity on Brexit," says McHugh.

We have been reporting of late that Sterling has been struggling in a sideways trend and was unable to crack higher, largely because markets were nervous that the ongoing improvement in Labour's position in the polls meant that a hung parliament was becoming increasingly likely.

However, a YouGov poll out Tuesday showed that Labour had actually seen their support slip by a point over the course of the past week, suggesting they might have reached a high-water mark.

"To my mind, the Labour Party is running out of time to significantly narrow the gap with the Tories. Against this backdrop, the pound sterling is attracting investors' attention," says Marc-André Fongern, a foreign exchange strategist with MAF Global Forex.

A majority for the Conservatives would put to rest months of uncertainty over Brexit and end the political stalemate that has characterised the country's Parliament.

"Provided the Conservatives win the election, the UK outlook should stabilise. Sterling and domestically- focused equities stand to gain under such a scenario, and a stronger currency, rising consumer spending and increased domestic activity would support industries such as retail, real estate, financials, and airlines," says Union Bancaire Privée, a Swiss private bank.

Foreign exchange strategists at Citibank - the world's largest foreign exchange dealer - have crunched the numbers on the British Pound over coming months, and there are five major scenarios to watch.

"If Conservatives win the general election, a clearer Brexit path will be paved," say Citibank in a briefing to clients of their Wealth Management unit. "If the general election result in hung parliament, nothing is resolved and Brexit remains in limbo."

According to their current base-case scenario, the Pound-to-Euro exchange rate is forecast at 1.1913 in six-12 months, with the Pound-to-Dollar exchange rate forecast at 1.37.

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Pound Aided by Technical Trades

It appears that the sizeable bids in Sterling seen on Wednesday was triggered when London stock markets opened for trading at 08:00:

Above: GBP/EUR hits a seven-month high. The opening of London markets at 08:00 coincided with a huge rally in Sterling.

It is not uncommon for Sterling to make a big move when London traders take to their desks: the exact reason behind the fresh bid today is however not clear.

What we do know though is that the Pound has broken through a key technical barrier around 1.30 against the Dollar, which appears to have broken a barrier that was holding the broader market back. The opening of the door at 1.30 now appears to have encouraged buying in Sterling right across the board.

Above: GBP/USD breaks through a key resistance level, sucking other GBP exchange rates up in sympathy.

Neil Wilson, Chief Market Analyst at Markets.com says there are a number of factors behind GBP/USD's break above 1.30:

"The softness in the Dollar since the end of November has been very pronounced... trade war worries have hit the USD."

The Dollar slumped at the start of the week on consecutive comments that suggested the U.S. would not be in a position to sign a trade agreement with China by year-end: Monday saw Commerce Secretary Wilbur Ross hit the newswires with a first warning, while Tuesday saw President Trump tell reporters on the sideline of the NATO conference in London that the deal might only be signed following the election.

Wilson warns that for Sterling's advance against the Dollar to become more convincing, the market must close today above 1.30 for "this to signal a material change in position."

"We are wary of the upside being limited. Initial resistance lies in the 1.3075-1.1325 region in this regard. A slide back through 1.2970/40 support would suggest the rally is over and return us to a range into the elections," says Mark Wilkin, a cross-asset strategist with Lloyds Bank.

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