Sterling inches higher, investors keep bets on May victory

31/05/2017 02:21 AST

Sterling rose against the dollar on Tuesday, with investors shrugging off opinion polls showing British Prime Minister Theresa May's lead over the Labour opposition narrowing less than two weeks before a general election.

The pound has risen nearly 4 percent since May called a snap election for June, as investors bet a then-predicted landslide majority for May would result in a stronger hand in negotiating Britain's exit from the European Union.

But polls taken since the opposition Labour Party and May's Conservatives released their election manifestos have shown Labour catching up, worrying investors and pushing the pound down almost 2 cents last week.

While the latest polls confirm the narrowing trend, they still show May's Conservatives with a solid lead, leaving some such as MUFG currency strategist Lee Hardman, keeping their bets in place.

"If the polls are to continue to narrow next week we could obviously drop down another couple of big figures. But I think there's good support around $1.26-1.27," he said.

"Our base case scenario is the Conservatives will ultimately win a larger majority - which could see cable (sterling/dollar) pop back towards the $1.30 level following the election." Sterling was up nearly 0.2 percent at $1.2855 by 0852 GMT.

It was up 0.3 percent against at 86.69 pence per euro. In a televised debate on Monday, May said she would walk away from divorce talks with the European Union without a deal if she had to, but Labour leader Jeremy Corbyn said he would make sure an agreement was reached if he won power.

Kathleen Brooks, research director at City Index, said markets could begin pricing in the prospect of a Labour victory if the polls were to narrow further, although that would not lead to an "outright collapse" in sterling given Labour's stance towards Brexit.

"While Labour's tax and spending plans are unlikely to win any friends in the financial sector, the party's more sanguine stance towards striking a trade deal during the Brexit negotiations might find common ground with some City grandees," she wrote.

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