In early trading this week, the cable peaked to its highest since October 22nd, touching $1.2972 against the dollar, amid election speculation.
In an interview published in the Telegraph, UK Prime Minister Boris Johnson explained that all Conservative Party candidates standing in next month’s election have backed his Brexit agreement.
All 635 Conservative candidates have agreed to vote to pass the withdrawal agreement. Johnson’s Conservatives are currently beating the Labour Party by 10 to 17 percentage points, four polls showed late on Saturday.
According to a poll published by Good Morning Britain, the Tories had a 14-point lead.
A currency analyst at MUFG, Lee Hardman, said:
Markets are just moving to price in a higher likelihood of a majority for the Tories. We’ve had the opinion polls at the weekend generally all showing increasing support for the Tory party, making the market more confident they could win a majority, seen as more favourable in the short term.
The cable peaked to its highest since October 22nd, touching $1.2972 against the dollar, while against the euro, the pound strengthened further to reach a new six-month high of 85.22 pence, last trading higher by 0.4% at 85.29 pence.
If GBP rises above the $1.3012 level hit in October, it will be the highest since May.
Nomura FX strategist, Jordan Rochester, explained that this latest update isn’t a shock, given that Johnson had already rid the party of anyone who didn’t back the deal.
“The truth is, it’s probably a specific flow that’s driving it,” Rochester said. He also noted that investor confidence in a Tory lead helped to boost the pound even further.
This follows feedback from surveys and reports ahead of next month’s general election. The UK will most likely leave the European Union by the end of January 2020 if the Tories do indeed hold power.
The Labour party is due to release its manifesto on Thursday.
The $1.30 level is quite a strong psychological resistance here. For it to really have momentum, you need to see the Labour party’s manifesto not do as well as it did in 2017.
On the contrary, however, any gains may be temporary as it has been suggested that election news may be distracting from wider market pessimism on GBP’s long-term outlook. Lower-than-expected data and a short time period to negotiate a trade deal have both weighed on market sentiment.
In a note to clients, Ulrich Leuchtmann, head of FX and commodity research at Commerzbank, said:
GBP-USD strength is mainly a reflection of EUR-USD strength. If we want to know how GBP-specific effects work, we have to keep an eye on EUR-GBP.