Sterling falls ahead of long election night

Sterling was drifting lower on Thursday and investors were selling UK government debt as voting began in the UK general election, after which no single party is expected to be able to form a government.

The pound held above the $1.50 mark, down 0.3 per cent at $1.5203. Since the start of the campaign on April 30 when Parliament was dissolved sterling has been heading down from around $1.54, in line with a wider trend for continued dollar strength on the currencies markets.

Against the euro, sterling fell 0.4 per cent to €1.3383, its weakest level against the shared currency since early February.

"Different time horizons offer different prospects for the pound," said James Knightley, senior economist at ING.

"Over the very short term, a hung parliament would be the worst outcome as the full degree of uncertainty would remain in place.

"We would expect the political risk premium for the pound to decline both in the case of a Labour-Lib Dem minority coalition and a Conservative-Lib Dem minority coalition, meaning that sterling would appreciate somewhat."

Sam Hill, chief economist at ING, said: "In most of the election scenarios considered, sterling is a net loser. Most multi-party coalitions, minority governments or election reruns lead back to a focus on the UK's twin deficits and the inability of a weak or temporary government to deliver the necessary fiscal consolidation."

Traders said the UK currency could face a volatile night as the results come in after polls close at 10.00pm, when the first opinion polls of the day, and the last of the campaign, will be published.

The majority of the seats will declare winners in the early hours of the morning, when a clearer picture of the electoral maths ahead of an expected round of coalition building will emerge, before the start of full trade on Friday.

Angus Campbell, senior analyst at FX Pro, said: "As we go through the night and the picture becomes clearer there's plenty of potential for volatility to pick up, especially since volumes will be thinner during the overnight session.

"If the [opinion] polls turn out to be right then we could see a far messier situation than five years ago and negotiations could go on for longer than the five days it took for the previous coalition to be formed, making the next few days a bit of a roller-coaster ride for UK markets and investors."

Benchmark 10-year UK gilt yields were continuing to rise above the 2 per cent level last seen in December, up 3 basis points to 2.013 per cent. It came in line with a sell-off in wider European government debt markets.

Equities markets followed their peers lower, with the FTSE 100 down 0.7 per cent at 6,884.35, led by energy stocks at sector level. The more UK-focused FTSE 250 fell 0.4 per cent to 17,350.75. There were also declines of similar magnitudes on stock indices across global markets.

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