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Pound Falls as Poll Shows Conservatives May Miss Their Majority

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Wednesday, May 31st, 2017
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The pound declined after a poll showed Theresa May’s Conservative Party may miss winning a majority at next week’s general election and face a hung parliament.

Sterling dropped against all its Group-of-10 peers after a YouGov poll in the Times, based on a new model, showed the prime minister’s party may fall short of an overall majority by 16 seats. The pound has been strengthening in past weeks, despite a slowing economy and increased security risks, as earlier surveys suggested a bigger Tory lead.

“The slide in the pound is another example of markets not being prepared for a close election, let alone a hung parliament,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “Speculative short positions have been unwound, leaving sterling looking for fresh direction. So speculators may reload short-pound positions if the election is indeed a lot closer than was implied by the sharp rally when the election was announced.”

UK Election Jitters Graph

Westpac, the second most-accurate major currencies forecaster in Bloomberg’s latest ranking, maintains its expectations for the sterling to fall to $1.26 over the next month, Callow said.

  • GBP/USD slides 0.3% to 1.2823, halting two-day advance; pair fell to as low as 1.2792
    • Pound has strengthened 2.1% this quarter
    • Several spot desks were caught long GBP/USD after inheriting sell-stops layered under 1.2840 hourly support, in wake of the YouGov/Times poll, according to Asia-based FX traders, who asked not to be identified as they aren’t authorized to speak publicly
    • Option-related bids under 1.2770
  • Macquarie Bank notes the poll uses an untested model with a huge margin for error
    • “We don’t believe this poll,” Macquarie strategists, including Gareth Berry, write in note. “It’s based on a controversial untested methodology and all other polls still suggest precisely the opposite outcome”
  • USD/JPY climbs 0.2% to 111.05, halting three-day decline
    • End-of-month demand for USD/JPY seen over the Tokyo fixing has waned very little, according to an Asia-based FX trader
    • Broader U.S. dollar buying seen by macro accounts testing resolve of intraday short positioning, with stops appearing above 111.20: trader
  • Fed Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound
  • Watch more: UBS expects support for pound heading into 2018 (Video)

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