The pound rose to a seven-week high against the dollar as investors took the prospect of a U.K. election with no outright winner in their stride.
Sterling posted for a weekly gain versus all but one of its 16 major peers as polls indicated that neither the Conservative nor Labour parties will win enough support on May 7 to govern alone. Given the likelihood of protracted negotiations to form a workable coalition, options traders are understating the risks of the election, according to RBC Capital Markets.
“Some sort of coalition is now priced in, so shocks to the market should be limited,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. “It does seem that the market’s focus isn’t directly on the general election right now, allowing the pound to piggy-back broad dollar weakness.”
The pound rose 0.7 percent to $1.5167 as of 4:31 p.m. London time and touched $1.5186, the highest since March 6. The U.K. currency strengthened 0.4 percent to 71.59 pence per euro, having advanced 0.9 percent this week.
Next month’s vote is forecast in opinion polls to be the closest-run in a generation. That raises the prospects of prolonged talks to form a government, and even risks leaving Britain with its first minority administration since the 1970s.
More than 60 percent of Nomura’s clients expect another Conservative-led government following the May 7 vote, the bank’s analysts wrote in a note dated April 21.
If Ed Miliband’s Labour party wins, the pound will fall against the dollar, according to more than 68 percent of those polled, while 72 percent see sterling climbing or unchanged after a Conservative victory. Goldman Sachs Group Inc. echoed that view this week, saying the incumbents are seen acting in a more market-friendly manner.
U.K. government bonds rose for a second day on Friday, with the 10-year yield paring its biggest weekly increase since March 6.
The benchmark 10-year yield fell four basis points, or 0.04 percentage point, to 1.65 percent. It jumped 15 basis points, on April 22, the most since August 2013 and climbed six basis points this week. The 5 percent gilt due in March 2025 rose 0.44, or 4.40 pounds per 1,000-pound face amount, to 130.405.