June 7, 2017 / 9:11 AM / 2 years ago

Sterling sets two-week high on eve of UK vote on prospect of May win

LONDON (Reuters) - Sterling climbed to a two-week high against the dollar on Wednesday, with investors increasingly taking the view that Prime Minister Theresa May’s party will win a majority in Britain’s general election on Thursday.

FILE PHOTO: A one pound coin lies on a Union Flag in this picture illustration shot on May 3, 2017. REUTERS/Darren Staples/Illustration/File Photo

The pound broke out of a half-cent trading range seen for most of the European morning to touch $1.2970 by 1445 GMT and was last up 0.4 percent on the day at $1.2960.

“I think we’re seeing a Conservative majority being priced into the market,” said Jake Trask, corporate dealer at OFX.

Trask noted that sterling broke out of its range at around the same time that bookmakers’ odds shifted to reflect an increased bias towards May’s Conservatives securing a parliamentary majority.

The pound gained as much as 4 percent after May called a snap election seven weeks ago, as polls suggested a landslide win for her Conservative party that would give the prime minister a stronger hand in Britain’s negotiations on leaving the European Union. Those talks begin later this month.

But recent polls predicting outcomes ranging from a majority for the Conservatives to a ‘hung’ parliament have seen sterling slip from the $1.30 mark it hit last month.

It has held on to most of its gains, however, with most analysts attributing its resilience to investors still being confident of a Conservative win.

Britain’s Conservative Party is generally perceived by investors to be business-friendly.

Sterling was 0.6 percent higher at 86.80 pence per euro, its highest since May 30. It hit an eight-day high versus the euro as investors pared back expectations of a hawkish European Central Bank after a report said the bank had trimmed its inflation forecasts.

Despite keeping gains versus the dollar, 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.

The latest U.S. positioning data speaks to that decline. It 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.

“Large majorities are no guarantee that sterling will sustain its gains, and with UK growth stalling, market complacency over the start of Brexit negotiations and positioning now broadly neutral, our bias would be to sell sterling rallies,” Bank of America Merrill Lynch currency strategist Kamal Sharma wrote in a research note.

Reporting by Ritvik Carvalho; Editing by Adrian Croft

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