Britain's pound recovered from a half a percent drop on Wednesday after a poll showed the country's ruling Conservative party still in the lead, overriding a previous projection of a hung parliament in elections next week. Research company Panelbase said Prime Minister Theresa May's lead over the Labour Party increased to 15 points, giving the pound some respite from a plunge on a YouGov projection that showed her Conservatives failing to secure an overall majority in the June 8 vote.
Sterling was 0.2 percent lower on the day at $1.2836 by noon in London, recovering from a low of $1.2770 hit in morning trade. It remained half a percent lower at 87.38 pence per euro. The pound has reversed nearly half of its 4 percent gain since May called the election, her narrowing lead in polls weighing on investors' expectations of a landslide victory for the Conservatives, which has been pitched as strengthening May's hand in Brexit negotiations.
"To the extent to which this cautious, value-chasing long sterling position has been caused by the prospect of ... a higher Tory majority - this investment premise is now fading," said Petr Krpata, currency strategist with ING in London. Barely reacting to euro zone inflation data that came in below expectations, the euro ticked up to a three-day peak of $1.2230. Investors are turning positive on Europe's economic prospects after an ebbing of political risk from centrist Emmanuel Macron's French presidential election win.
They are also awaiting clues from the European Central Bank on whether it will begin to wind down its bond purchase programme in light of signs that the euro zone economy is improving. But ECB President Mario Draghi on Monday repeated the need for "substantial" stimulus. "Outperforming European risk assets are a key currency driver, to some extent confirmed by foreign investors having stressed that they're starting to increase their allocations to Europe," said Manuel Oliveri, currency strategist with Credit Agricole in London.
"Weak inflation is keeping the ECB rather capped in terms of rate expectations while improving growth momentum is actually supporting risk assets. That's why the euro has lost some kind of sensitivity to downside surprises in inflation." The dollar index which measures the currency against a basket of peers, fell 0.2 percent to 97.082, holding above last week's 6-1/2-month low of 96.797. The US currency was 0.1 percent weaker at 110.815 yen, staying within recently traded ranges.
Investors' concerns that investigations into President Donald Trump's ties with Russia could hamper his administration's progress on tax cuts and other promised stimulus measures have undermined the dollar in recent weeks. Consumer spending in the United States recorded its biggest increase in four months in April and monthly inflation rebounded, pointing to firming domestic demand that could allow the Federal Reserve to raise interest rates in June. But some market participants say signs of softness in some economic data have raised questions about whether the Fed can hike interest rates two more times this year and begin shrinking its balance sheet.
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