June 5, 2017 / 10:46 AM / 2 months ago

UPDATE 2-Sterling hits 10-day high as traders bet on Tory victory

4 Min Read

* Graphic: Sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (re-leads, updates prices)

By Ritvik Carvalho and Jemima Kelly

LONDON, June 5 (Reuters) - Sterling rose to its highest in ten days against the dollar on Monday, with investors taking comfort from a opinion poll that gave Britain's ruling Conservative Party a comfortable lead ahead of Thursday's parliamentary elections.

The pound was boosted after the election was called on bets a landslide win for Prime Minister Theresa May would translate into a stronger bargaining position in Britain's exit talks with the European Union, which begin on June 19. However, some recent polls have shown the race tightening.

The pound had opened around half a cent down from Friday's close in Asian trading, as traders sold the currency after a militant attack in London over the weekend that killed seven and injured 48.

But it recovered most of those losses when trade opened in Europe, and then climbed higher after an ICM poll showed May's Conservatives 11 points in front of the Labour opposition.

Sterling reached as high as $1.2940 after U.S. trade opened, its highest since May 26, and putting it up around a third of a percent on the day.

Against the euro, the pound gained as much as 0.6 percent, trading at 87 pence versus the single currency.

"I think there may be some selling out of euro/sterling," said Mizho's head of hedge fund FX sales, Neil Jones. "The big position this week was long euro, short sterling."

"We've got a triple-whammy on Thursday with the ECB, the UK elections, and (former FBI director James) Comey testimony, and the market is running short sterling into that, but that ICM poll has potentially put the Tories back on the map a bit and people are cutting short sterling positions."

A dip in an index of services sector sentiment earlier had little impact.

Sterling has wobbled over the past two weeks, with investors' confidence that May would secure a clear victory shaken by opinion polls predicting a wide range of outcomes for the June 8 snap election - from an increased majority for the Conservatives to a hung parliament.

"The worst case outcome is this grey area of uncertainty - the hung parliament and no stable government formed by Friday or Monday - markets will sell off on that," said ING currency strategist Viraj Patel.

One-week sterling-dollar implied volatility - a hedge against price swings in the currency - was at 12.65 percent, near its highest levels since Jan. 17, when May set out her strategy for Britain's departure from the European Union.

Investors increased their bets against the pound versus the dollar in the week up to last Tuesday, the first increase in net "short" positions since May surprised financial markets with her announcement of the snap election. (Reporting by Ritvik Carvalho; Editing by Toby Chopra)

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