Pound Climbs To 2-Year High As Traders Jump On Pre-Election Rally

Moving higher for a fifth straight session, the pound climbed to fresh cycle highs on Thursday after the London open, as expectations for the return of a Tory majority after next week's snap vote have helped bolster the British currency, which has risen 9% off its lows.

The pound's torrid pre-election rally has brought the currency to its highest level vs the dollar in more than 7 months, and its strongest level vs. the euro in 2 years.

Cable climbed another 0.2% on Thursday to trade above $1.31 for the first time since May 7. If it holds its gains until the end of the session, it will mark the pound's longest winning streak (five sessions) since June.

As the FT explains, a Conservative majority is the more market-friendly outcome because it would promote greater certainty: PM Johnson would finally be able to push through his version of the withdrawal agreement negotiated with the EU27, allowing the UK to officially begin the process of separating from the EU, and initiating the next round of negotiations on the nature of the trade deal.

"Rarely have voters been asked to pass judgment at such a critical time for the economy and for financial markets," Ruth Gregory, a senior economist at Capital Economics, told the FT.

But Johnson's pledge not to extend the Brexit transition period beyond the end of next year could create problems for sterling bulls down the line.

After the currency's initial rally, attention would shift "very, very quickly," Willem Klijnstra, currency analyst at Legal & General Investment Management, told the FT. His firm has been neutral on its sterling exposure since September. "If we do get a Conservative win then we are straight back to Brexit."

The pound has risen sharply since October, when Johnson successfully pushed for the snap vote, ending a period of market chaos instigated by his insistence that the UK could leave the EU without a deal.

Still, plenty of traders wary of an election upset are hedging their positions with out-of-the-money dollar calls, as one strategist told Bloomberg.

"The central case seems to be a comfortable Tory win that could keep the GBP/USD supported, moving toward $1.34 and higher," said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA. "Investors are hedging their bets ahead of the vote, exploiting the relative cheapness of out-of-the-money dollar calls."