A hung parliament result in the UK election could see sterling slide to a new low of 92 pence against the euro, according to analysts, further damaging the position of Irish exporters and accelerating the decline in UK tourist numbers.
The British currency was marginally up against the euro at 86.9 pence on Wednesday, strengthening throughout the day ahead of what promises to be a turbulent 24 hours with the British election and European Central Bank’s monthly policy meeting falling on the same date.
Sterling gained as much as 4 per cent after prime minister Theresa May called a snap election seven weeks ago with polls suggesting a landslide win for her Conservative party would give her a stronger hand in Britain's negotiations on leaving the EU.
But recent polls predicting outcomes ranging from a majority for the Conservatives to a hung parliament have seen the pound shed some of these gains.
“It’s now universally agreed that a hung parliament would be the very worst case scenario for the pound with some analysts predicting the single currency to spike as high as £0.92 on the news,” Investec’s Irish arm said in a note to investors.
"An outright Labour win would probably be slightly less negative for the pound, while a smaller Tory majority (of 17 seats) would be less again," it said.
“At the other side of the spectrum a Tory majority of about 40 seats should see the pound strengthen although not markedly as this outcome is partly priced in.”
Brexit referendum
Since the Brexit referendum last June, sterling’s value against the euro has ranged between 77p and 91p, damaging the competitiveness of Irish exports, denting UK tourist numbers, and eroding the profitability of companies that report in euro but generate revenue in the UK.
Alongside the outcome of the UK election, investors are also awaiting the European Central Bank’s policy announcement on Thursday for clues on its stance towards tapering its stimulus programme.
Despite holding on to recent gains, sterling has fallen 2.5 per cent in trade-weighted terms in less than four weeks since polls first suggested a narrowing lead for the Conservatives.
US positioning data shows speculative investors have flipped back to betting more against the pound; many hedge funds expect any recovery in sterling will be short-lived, regardless of the election result.
"Large majorities are no guarantee that sterling will sustain its gains, and with UK growth stalling, market complacency over the start of Brexit negotiations and positioning now broadly neutral, our bias would be to sell sterling rallies," Bank of America currency strategist Kamal Sharma wrote in a research note.
