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Why sterling could see a major wobble as UK election results come in

The U.K. is holding a General Election later this week and currency analysts have been poring over the polling data to predict what could happen to sterling as the results come in.

"A run on the pound is a possibility come Friday morning should Prime Minister Theresa May fail to win a majority, therefore casting doubt over the whole Brexit negotiation process under Labour or a coalition," Jake Trask, FX research director at currency transfer provider OFX, said in an emailed comment Monday morning.

While the Conservatives remain likely to gain the most seats in this week's election, a poor result could see the party lose its majority in the Houses of Parliament. The Conservatives held 330 seats and require 326 seats to form a majority government.

British pound coins can be seen next to American Dollar notes.
Getty Images
British pound coins can be seen next to American Dollar notes.

However, if the Conservatives increase their majority, the pound would experience a relief rally, according to Ray Attrill, head of FX strategy at National Australia Bank.

"In the event that the polls prove to be giving a misleading impression of a fairly slender Conservative poll lead and instead they are returned to power with a reasonably increased majority (say 15 to 20 seats or more) then GBP should enjoy at least a modest relief rally," he said in a research note on Monday.

"Our current forecast for GBP/USD at $1.30 by end of June and AUD/GBP at 0.56 likely requires such an outcome. On GBP/USD this assumes that the U.S. dollar comes to no harm out of the June 13/14 FOMC (when the Federal Reserve will meet to discuss interest rates)."

However, he added there is downside risk for the U.K. currency if the result is not much different from the 2015 General Election, or if the result is a hung Parliament with no party having a majority.

"Knee-jerk GBP reaction would almost certainly be negative since it would be seen as further weakening an already weak negotiating position for the U.K. government and with that the risk of 'no deal' (with the European Union)," Attrill said.

The U.K.'s currency is experiencing volatility as the polls between the two major parties narrow.

Sterling was trading lower around the $1.286 level most of Monday morning, hit by a reading for May's U.K. services PMI (Purchasing Managers' Index) which missed expectations, but the currency later rose to hit a day's high of $1.2911 after the release of an ICM poll showing the ruling Conservative Party leading by 11 points.

However, other polls have offered different opinions; eight polls were released over the weekend, with the Conservative's lead varying from 1 point to 12 points. The pound's trade-weighted value has fallen by 3 percent in less than four weeks as U.K. Prime Minister Theresa May's campaign has hit problems, such as receiving criticism for her manifesto proposals, according to Reuters.

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