May 30, 2017 / 9:56 AM / a year ago

Centre-left UK coalition might be positive for pound - JP Morgan

LONDON (Reuters) - Sterling looks set for a volatile run in to British elections next week but an argument can be made for markets reacting positively to a defeat for Prime Minister Theresa May’s Conservatives, according to analysts from U.S. bank JP Morgan.

Wads of British Pound Sterling banknotes are stacked in piles at the GSA Austria (Money Service Austria) company's headquarters in Vienna July 22, 2013. REUTERS/Leonhard Foeger/File Photo

The Conservatives’ lead has shrunk in some opinion polls to as low as 5 percentage points from close to 20 points a month ago, driving the pound lower in the past week.

That has seemed in line with traditional financial market logic, which has favoured right-leaning parties who keep a tighter rein on public spending over those like Britain’s leftist Labour Party who want to tax and spend more.

But the U.S. bank - the world’s second biggest trader of currencies, according to industry surveys - said the prospect of a softer Brexit from Europe under a Labour-led administration meant sterling might react positively to a defeat for May.

“A hung parliament would in more normal circumstances be viewed as quite negative for sterling,” Paul Meggyesi said in a note distributed to media on Tuesday and sent to clients at the end of last week.

“But in the post-referendum world, all political developments need to be viewed through a Brexit prism and an argument can be made that a hung parliament which delivered or held out the prospect of a softer-Brexit coalition of the left-of-centre parties ... might actually be GBP positive.”

Reporting by Patrick Graham, editing by Nigel Stephenson

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