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The pound jumped today after it became clear the Labour party would back a December General Election, but it has since settled back down as traders steeled themselves for a volatile six weeks.

Sterling has had an extremely rocky few months. It hit a 45-year low against the dollar in August as Prime Minister Boris Johnson’s government looked intent on taking Britain out of the European Union without a deal.

It has since risen significantly, however, thanks to a no-deal exit being taken off the table – for now – and Johnson striking a new deal with the EU. By 9pm today it stood at $2.863.

An election campaign brings a new set of uncertainties for sterling traders. “Sterling will be buffeted by the latest polls,” said Chris Towner, director at financial risk adviser JCRA.

“In case Labour is doing well, it is expected to put pressure on sterling and if the Conservatives are doing well in the polls, we expect support for the currency.” This is because a Conservative majority would likely cause Britain to leave the EU with a deal.

Edward Park, deputy chief investment officer at investment firm Brooks Macdonald, agreed. “Should parliament return in December with a mandate for Johnson’s deal, sterling will value the reduced no deal threat and continue the rally seen in recent weeks,” he said.

Other factors will also affect sterling in the meantime. If the European Central Bank (ECB) cut interest rates more deeply than expected, the pound is likely to rise against the euro.

Should economic data in the UK improve, the Bank of England could signal that rates are likely to rise once there is more Brexit uncertainty. This would also push sterling higher.

Nomura foreign exchange strategist Jordan Rochester said: “Polling is likely to be volatile during that six-week election campaign and investor inflows into GBP are likely to suffer from the uncertainty.”

Sterling traders should take “lessons from history,” he said. “When the 2017 election was announced in April it led to a 1.3 per cent rally in GBP on the day. But he said this was the “peak of the optimism” and sterling then fell around six per cent against the euro.

“One thing is for sure,” Towner said, “a hard Brexit is now an unlikely outcome and certainty surrounding Brexit will give sterling a very welcome boost.”

By Harry Robertson

Source: City AM

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