Sterling surged to seven-month highs on Wednesday as investors raised their expectations for the ruling Conservative Party to win an outright majority, which could remove some of the political uncertainty that has weighed on the currency.
Investors have welcomed the prospect of Britain avoiding another hung parliament. Many appear to think a parliamentary majority under the right-leaning Conservative Party would do more good for the pound than ongoing worries about a more decisive break from the European Union should Prime Minister Boris Johnson win the Dec. 12 election.
Polls have consistently given Johnson's party a lead over the opposition Labour Party. While Johnson has vowed to take Britain out of the EU on Jan. 31, the Labour Party has said it would push for a second referendum on the departure.
"The market continues to cut back on sterling short portfolios & hedges in expectation of certainty derived from single party majority expectations," said Neil Jones, head of FX hedge fund sales at Mizuho bank.
Some investors also worry about what the Labour Party's spending plans would do for government finances, although Labour leader Jeremy Corbyn says its proposals are fully costed.
By 0930 GMT, the pound had added 0.5% to touch $1.3063 , its strongest since May.
Against the euro too, the pound rallied 0.5% to 84.855 pence , another seven-month high.
The pound was little moved by the final IHS Markit/CIPS UK Services Purchasing Managers' Index survey data, which confirmed that Britain's services sector shrank in November.
Sterling has soared since October, gaining 6% in the last two months, when the prospect of a disorderly no-deal Brexit quickly receded after the EU granted Britain a delay to its exit until Jan. 31.
Investors have since latched on to the prospect of Britain avoiding a hung parliament.
Some weakness in the greenback as also behind sterling's rally, and triggered some technical demand for the British currency.
Traders reported some option structures above $1.30 fueling some pent-up demand for the pound. Refinitiv data shows some large options of around $1.5 billion around $1.31, which could mean that sterling may hit resistance around that level.
Five-year credit default swaps (CDS) on British government debt are down around 5 basis points since the election was called in early-November, as expectations grew that the Brexit impasse could be breached, according to IHS Markit.
Investors could grow more cautious as elections approach, with two-week implied volatility, a contract straddling the election, rising steadily to the highest since May. (Reuters)