Pound Surge Clouded by EU Referendum Risk on Tory Election Win

The pound’s surge on a projected Conservative victory in the U.K. general election was clouded by the prospect of a referendum on the nation’s membership of the European Union.

Conservative Prime Minister David Cameron campaigned on a pledge to renegotiate Britain’s membership of the EU, its biggest trading partner, before holding an in-out vote by 2017. Strategists said that would weigh on the outlook for the pound.

Sterling jumped the most since 2009 against the euro, and climbed at least 0.9 percent versus its 16 major peers, after a BBC forecast put the Conservatives on course to win 329 of Parliament’s 650 seats, more than in the last election in 2010.

“This is a relief rally that we usually get with a Tory win, but medium term it’s, ‘EU referendum here we come,’” said David Bloom, global head of currency strategy at HSBC Holdings Plc in London. “That is not good for the pound.”

The pound surged as much as 2.2 percent versus the euro as results continued to come in, and was 1.9 percent stronger at 72.47 pence as of 8:31 a.m. London time.

Britain’s currency rose 1.5 percent to $1.5471 after touching a more than two-month high of $1.5523. Bloom said $1.55 was “a sustainable rate.”

The Conservative election campaign focused on their economic credentials, with surveys showing them to be the the most-trusted party on managing Britain’s finances.

Volatility Drops

While a measure of expected volatility in the pound against the euro over the next three months tumbled Friday, it remained higher than the average for the past year.

U.K. government bonds may also face pressure as the question of Britain’s relationship with the EU weighs on investor demand. The securities lost 0.5 percent since the start of the year, the worst-performing European debt after Greece, according to Bloomberg World Bond Indexes.

“The initial impact will come from the result itself, and a strong Tory win will be seen as good news by all sterling markets,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London. “There will soon be anxiety about an EU referendum which might deter some overseas buyers.”

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