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The pound strengthened Monday to a fresh two-and-a-half year high against the euro, as weekend opinion polls continued to point to a win for the ruling Conservatives in this week’s general election.
The currency also rose against the dollar after polls in Britain’s Sunday newspapers all put Boris Johnson’s party in the lead. Though the gap between the parties has narrowed throughout the campaign, it is not enough to keep the Conservatives from returning to power this week if the polls are accurate. The weekend surveys spurred buying by European investors, according to traders.
The market “seems to price in a lot of certainty into what could still be very uncertain times,” said Michael Metcalfe, head of global macro strategy at State Street Global Markets. “The surprises of the referendum and recent elections have been dismissed, a punchy call given there are more marginal seats today than two years ago.”
Sterling strengthened as much as 0.3% Monday to 83.93 pence per euro, before erasing the advance to trade little changed. It also climbed as much as 0.3% against the dollar to $1.3181. The pound has strengthened 3% against the U.S. currency over the past month, as investors grow increasingly confident of a win for Johnson in the December vote.
A technical pattern in the euro-pound pair could bode well for sterling, with a so-called death cross pattern returning Monday for only the fourth time in the past decade. The pattern sees the cross’s 21-week moving average fall below its 89-week equivalent, an event that in the past ushered in average gains of about 2% for the pound over the course of almost three months.
Still, the cost of hedging against a fall in the pound has also surged as the election looms, showing lingering caution following the failure of most opinion polls to accurately predict prior votes such as the 2016 Brexit referendum. Two-week risk reversals show increased demand to hedge an unexpected outcome from Thursday’s voting.
Positioning on the currency also remains mixed, with leveraged funds slashing short positions to the lowest since May while asset managers have turned more bearish on the currency, according to the latest data from the Commodity Futures Trading Commission.
“The scope for surprise at this week’s general election is sizable,” wrote Goldman Sachs strategists including Alain Durre in a research note. “The share of voters that are still undecided -- so late in the campaign -- means that even a small swing in that slice of the electorate would lead to a hung parliament.”
--With assistance from Vassilis Karamanis and Cecile Gutscher.
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