Pound to get "near term bounce" should Conservatives or Labour win outright majority

The pound has been weakened in recent weeks as opinion polls showed the gap between the governing Labour Party and the Conservatives narrowing, suggesting a hung parliament and a potentially weaker government to deal with the struggling economy and a mountain of government debt.

In a research note, analysts at Nomura said they expected a “near-term bounce” for sterling if there is a clear winner as it would eliminate the political risk premium for the currency. However the note added that “tough choices” facing the next government to deal with the public finances were “likely to remain a persistent headwind for sterling in the months ahead”.

A clear winner could also see a rally for British gilts, Nomura said.

Despite the tightening opinion polls Nomura said it still expected a Conservative party victory, complete with a working majority, and put the chances of a hung parliament at just over one in three.

Nomura added that it did not think who won the election would affect the markets too much, so long as there was a majority government. The note said, “We think that financial market perceptions exaggerate the likely differences between the two main parties and that fiscal policy is likely to be tight whatever the election outcome.”

While Nomura put the odds of a Conservative majority government at 65 per cent, betting firm Paddy Power was offering odds of 6/4 on a hung parliament, 4/7 on a Conservative majority and 7/1 on a Labour majority.