Sterling suffers bout of UK poll nerves

Sterling dropped sharply against the dollar on Friday for a second consecutive day, falling 1.3 per cent following a strong performance in April, as markets braced for a potentially messy outcome to next week's election.

Although Conservative campaign chiefs believe David Cameron is finally starting to pull ahead in a very tight contest, the opinion polls are pointing to a hung parliament.

"Finally we are seeing some election uncertainty coming through," said Jane Foley, senior FX strategist at Rabobank. "Sterling could be on the back foot if there are doubts about the workability or sustainability of a coalition government."

This week's UK Polling Report poll of polls puts the Conservatives on 34 per cent and Labour on 33, but Ed Miliband, Labour leader, remains narrow favourite with bookmakers to become Britain's next prime minister.

Michael Gove, Tory chief whip, argues his party is gaining ground because of a fear among some voters that Mr Miliband can only enter Downing Street with the support of the Scottish National party. Labour insists it is still on course to be the largest party despite the expected loss of many seats in Scotland to the SNP.

Mr Miliband is struggling to shake off the Tory attacks because the opinion polls suggest that if he is prime minister Labour would need nationalist support to win votes in the House of Commons.

On a visit to Glasgow on Friday, the Labour leader again ruled out "any deal" with the SNP, but a minority Labour government would almost certainly require the support of Nicola Sturgeon's party on an issue-by-issue basis.

Market measures of sterling volatility against the euro and the dollar - key gauges of investor fear - rose in April, reaching levels not seen since 2011, and have since remained high.

Since March, investors have pulled out almost half a billion pounds from UK equity exchange traded funds, as electoral uncertainty contrasts with bullish sentiment in European markets, tempting investors to shift funds to the continent.

Jasper Lawler, market analyst at online trading firm CMC Markets, said: "We're seeing some sharp volatility in sterling and Gilt yields. Uncertainty around the election is contributing to this."

Angus Campbell, senior analyst at currency broker FxPro, said: "Investors are positioning themselves for uncertainty because the probability of a hung parliament is exceptionally high.

"Clients are bearish on sterling against the dollar and have taken out short positions. Weakness could continue over the coming days."

David Cameron was deemed by polls to have won Thursday night's BBC Question Time debate and Tory officials say there are "encouraging signs" that wavering voters are starting to come across to the Conservatives.

Mr Cameron is expected to engage in a frenetic final round of campaigning - including an overnight tour - in an attempt to convince voters he has the energy and desire for a second term in Downing Street.

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Markets fear that next Thursday's election could lead to extended haggling between parties and the possibility of weak government, regardless of whether Mr Cameron or Mr Miliband finally emerges as prime minister.

"A week ago it was neck and neck with Labour just ahead, now it's neck and neck with the Tories just ahead," said Anthony Wells of YouGov.

Mr Wells said even small shifts in national polls in the final few days of the campaign could be crucial, with a rise in the Tory vote of just 2 per cent possibly equating to 15-20 seats.

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