Sterling drops after poll showing risk of hung parliament

The British pound dropped on Wednesday after a new poll found that British prime minister Theresa May’s Conservative Party risks falling short of an overall majority in the June 8th national election.

The pound was down 0.3 per cent at $1.2816 after falling as low as $1.2791 earlier, approaching a one-month low of $1.2775 touched on Friday. It also slipped to a low of 0.8738 pound per euro, near Friday’s eight-week low of 0.8750.

New constituency-by-constituency modelling by YouGov showed the Conservative Party might lose 20 of the 330 seats it holds, while the Labour Party could gain nearly 30 seats, the Times of London said.

The news came after a string of opinion polls showed a narrowing lead for the Conservatives, shaking confidence among investors that she would easily win a majority in the election. "The narrowing in the polls has clearly dented sterling's performance and continues to weigh on the currency, and is probably likely to do so in the near term," said Mitul Kotecha, head of Asia macro strategy for Barclays in Singapore.

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Dollar yo-yos

The dollar touched a 12-day low against the safe-haven yen overnight as investors turned cautious amid political worries in Europe as well as weaker stock and commodity markets after a long American holiday weekend, but then it recouped its losses.

The dollar, which fell to 110.665 yen on Tuesday, last traded up 0.2 per cent at 111.05 yen. It continued to remain caged in a relatively narrow range between last week's high of 112.13 and a low of 110.24 on May 18th. Investors continued to fret that investigations into president Donald Trump's ties with Russia could hamper his administration's progress on tax cuts and other promised stimulus measures, concerns that have been undermining the dollar in recent weeks. The dollar index edged up 0.1 per cent to 97.420, holding well above last week's 6½-month low of 96.797.

Euro fears

The euro inched 0.1 per cent lower to $1.1175, pressured by fears of an early election in Italy and a softer-than-expected inflation reading in Germany. The latter sent German government bond yields to their lowest level in more than a month. Italy's 5-Star Movement voted over the weekend in favour of a proportional electoral system, raising the chances of an unprecedented autumn parliamentary election.

Investors continued to await clues from the European Central Bank that it would wind down its bond-purchase programme this autumn as planned in light of indications that the euro-zone economy is improving. But ECB president Mario Draghi on Monday repeated the need for "substantial" stimulus. "The main scenario is that the ECB will eventually taper its stimulus, although Draghi has given no hints about this as of now, and that is weighing on the euro," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust.

In the United States, consumer spending recorded its biggest increase in four months in April and monthly inflation rebounded, pointing to firming domestic demand that could allow the Federal Reserve to raise interest rates in June. But some market participants say signs of softness in some economic data have raised questions about whether the Fed can hike interest rates two more times this year and begin shrinking its balance sheet.

• Reuters