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The pound shot higher as currency traders moved to price in an emphatic victory for the Conservative party in the UK general election after an exit poll indicated Boris Johnson was on course to win an overall majority in parliament.
Sterling climbed 2.7 per cent to $1.351, its highest level against the US dollar since May 2018, putting it on course for one of its biggest ever one-day gains. The UK currency reached its highest level against the euro since December 2016, hitting €1.207.
Investors and analysts said a Conservative victory should remove some of the uncertainty clouding the UK’s path towards leaving the EU, allowing Mr Johnson to get his Brexit deal through parliament. The exit poll projected 368 seats for the Tories, a healthy majority in the 650-seat House of Commons. The Labour party, led by Jeremy Corbyn, was projected to win 191 seats.
“The market is now pricing in some certainty about UK politics but, more importantly, some certainty about Brexit,” said Seema Shah, chief strategist at Principal Global Investors. “This should be a path to a stronger economy, at least in the short term.”
The size of the projected majority for Mr Johnson would afford the prime minister greater flexibility in upcoming trade talks with the EU, leaving him less beholden to his party’s hardcore Eurosceptics, said Geoffrey Yu, head of the UK investment office for UBS Wealth Management.
Sterling has been buffeted by political developments ever since the surprise vote to leave the EU in June 2016. It had been gaining ground in the run-up to Thursday’s election as opinion polls pointed to a likely victory for the Conservatives, although it fell back slightly heading into the vote as a last-minute poll suggested that a hung parliament — in which no party has an overall majority — remained a possibility.
Some investors were taken by surprise amid frantic trading when polls closed at 10pm on Thursday. “The exit poll caught a few off guard; the recent tightening in the polls had concerned the market in recent sessions,” said Ian Tew, head of G10 FX spot trading at Barclays.
Investors had also been nervous about the prospect of a victory for Mr Corbyn, who had promised a borrowing splurge and to nationalise the rail and energy industries. The receding threat of nationalisation could be good news for shares in utilities and the oil and gas sector, while domestically focused stocks are also set to benefit from a lifting of uncertainty.
However, a stronger pound typically weighs on the blue-chip FTSE 100 index, as many of those companies earn a large part of their revenues overseas.
FTSE 100 futures contracts were down 0.4 per cent in early Asian trading on Friday, although changes in futures do not necessarily translate into market moves once London trading begins.
“With this result the UK could start becoming more of a normal country again from the point of view of international investors,” said Hetal Mehta, senior European economist at Legal & General Investment Management. “Some overseas investors had said you can’t invest with this level of uncertainty, or the possibility of a Labour government that would carry out nationalisations.”
In bond markets, analysts were expecting a decline in UK government bond prices at Friday’s open — meaning higher yields. Government debt, a haven for investors, typically gains ground in times of stress.
Despite the gains, the pound remains well below the level where it traded immediately before the EU referendum.
Some investors think the rally could fizzle out once markets refocus on the difficult task of negotiating a new trading relationship with the EU. “The market will digest this quickly but then I think we’ll see a pause for breath,” said Eoin Murray, head of investment at Hermes Investment Management. “The next phase of Brexit is going to be horrifically challenging, and I think that could cap gains for sterling.”