Sterling lifted by poll showing Conservatives six points ahead

Sterling drew support from an opinion poll on Monday that showed the ruling Conservative Party pulling ahead of the opposition Labour Party just three weeks before Britain's May 7 general election. Sterling fell to five-year lows of $1.4567 against the dollar in the Asian session, then climbed to $1.4675, up 0.3 percent on the day, after the poll came out. It was last at $1.4650, up 0.1 percent on the day.
It was up 0.3 percent against the euro at 72.205 pence. Sterling had lost ground last week after polls showed gains by the Labour Party.
The ICM poll for The Guardian newspaper, however, showed support for the Conservatives, led by Prime Minister David Cameron, rising three percentage points to 39 percent. Support for Labour fell 2 percentage points to 33 percent.
Many traders in London's right-leaning City say a Labour-led government would be a negative. But some foreign investors and analysts worry as much about a weak government unable to deal with Britain's current account and fiscal deficits. They also fret over a Conservative promise to hold a referendum on whether Britain should stay in the European Union.
Most opinion polls show a neck-to-neck race between the Conservatives and the Labour Party, meaning a hung parliament and a lengthy period of uncertainty is likely. A strong showing from smaller parties like the Scottish Nationalists also makes it hard to predict who will win and whether a stable government can be formed.
"I expect the prospect of an indecisive election result, with subsequent protracted coalition negotiations, or a minority government, living from hand-to-mouth on the back of fringe party support, leading to a second election in the autumn, like 1974," said Nick Beecroft, senior market analyst at Saxo Bank.
"This will keep sterling very weak against a resurgent dollar, and we continue to expect $1.40 in the next few weeks."
Currency options, which investors use to hedge their exposure to a currency or to speculate on it rising or falling, showed bets on volatility inching up again.
And risk reversals, a gauge of demand for options on a currency rising or falling, show a greater bias for sterling weakness against the dollar in the coming month.
One of the market's big US banks, Morgan Stanley, forecast the pound would fall to $1.39 by the end of June.
"We look for sterling losses to be more front-loaded, resulting from political and policy uncertainty in the UK," they said in a note. "Historically, minority governments in the UK have not lasted long before collapsing, requiring new elections."