Pound tumbles as key poll shows Conservatives’ lead is narrowing

The pound fell sharply on Tuesday, collapsing in response to polling data which suggested the Conservatives lead has narrowed just a day before the election.

Sterling appears to have stabilised so far this morning however, with GBP/EUR flat at €1.1852, GBP/USD muted at $1.3133, and GBP/CAD rangebound at C$1.7380. GBP/AUD and GBP/NZD are both holding steady at AU$1.9248 and NZ$2.0104 respectively.

Top of the docket today we have the Federal Reserve’s final policy meeting of the year. Could a dovish outlook for 2020 send the US dollar lower?

What’s been happening?

The pound suffered a significant setback overnight on Tuesday, tumbling from multi-month highs on fears Thursday’s general election could result in a hung parliament.

Expectations for a convincing Conservative majority have been a major source of strength for Sterling in the past few weeks, on hopes Boris Johnson will be able to pass his EU withdrawal deal and provide some short-term clarity on Brexit.

However, YouGov’s highly regarded MRP poll now predicts that the Tories will only win a 28 majority, a significant fall from the 68 previously forecast and well within the margin of error for a hung parliament.

Meanwhile, the euro soared yesterday on the back of a surprise improvement in Eurozone economic sentiment.

The latest ZEW survey revealed sentiment in the bloc turned positive for the first time since April, boosting hopes the Eurozone economy may finally be making the first steps towards recovery.

Finally, the US dollar was left to trade sideways on Tuesday as USD investors were reluctant to alter their positions ahead of the Federal Reserve’s latest rate decision. 

What’s coming up?

In the spotlight today we have the Fed’s final rate decision of 2019.

The Fed is widely expected to keep rates on hold this month, having cut rates in its previous three policy meetings in an effort to maintain the US economy’s momentum.

However, we could still see some movement in the US dollar this afternoon in response to the bank’s forward guidance for 2020. Expect to see USD exchange rates weaken if the Fed hints that additional rate cuts could be on the cards for next year.

For GBP investors the focus will undoubtedly remain on UK politics in what is the final day of campaigning ahead of tomorrow’s election.

The pound may be vulnerable to further losses if fears of a hung parliament persist.
Meanwhile, the absence of any notable data could see the euro struggle to find momentum today.