LONDON (Reuters) - Sterling hit its highest level in almost two weeks against the dollar on Tuesday before easing slightly, still buoyed by investors’ expectations of victory for the ruling Conservative Party in a general election on Thursday.
The pound has seen choppy trading on polls suggesting outcomes ranging from a majority for Prime Minister Theresa May’s party to a ‘hung’ parliament in which no party has an overall majority. A poll late on Monday from Survation for ITV television put the Conservatives’ lead over the opposition Labour Party at just 1 percentage point.
That contrasted with an earlier ICM poll showing the Conservatives with an 11 point lead, which sent sterling higher on Monday.
“We’re seeing a little bit of ping-pong (in the pound) depending on where the polls are leaning, but I think it will calm down just as we approach the election,” said Thu Lan Nguyen, analyst at Commerzbank.
“Most (investors) are still expecting a Tory (Conservative) win but not the scenario that they’re going to expand their majority.”
Investors had bet a predicted landslide win for May would strengthen her position in Britain’s exit talks with the European Union, due to start later this month. But the latest polls were moderating some of those expectations, Nguyen said.
The pound peaked on Tuesday at $1.2951 against a broadly weaker dollar, its highest in 12 days, before edging back to trade 0.1 percent lower on the day by 1606 GMT at $1.2895.
While it has retained most of its gains against the dollar since May called the election seven weeks ago, sterling has fallen 2.5 percent in trade-weighted terms in less than four weeks since polls first suggested a narrowing lead for the Conservatives.
U.S. positioning data shows speculative investors have flipped back to betting more against the pound; many hedge funds expect any recovery in sterling will be short-lived, regardless of the election result.
One-week sterling-dollar implied volatility, which measures the cost of hedging against price swings in the currency pair, was at 12.5 percent, near its highest levels since Jan. 17, when May set out her Brexit strategy.
“Yes, the UK election is still something which markets are still worrying about, but one thing which is pretty much certain within the UK elections is that there is no (Brexit) U-turn on the cards,” wrote ThinkMarket analysts in a research note.
“Therefore, political risk is somewhat a limited factor.”
Editing by Gareth Jones