Tightening in the UK election opinion polls put the pound on the back foot on Wednesday as the latest YouGov projections suggested the Conservatives could fall short of the majority needed to win outright.
Investor confidence was shaken as the spectre of a hung parliament resurfaced after the constituency-by-constituency estimate by YouGov – commissioned by the Times – suggested the Tories could lose 20 seats and Jeremy Corbyn’s Labour gain as many as 28.
This would mean Theresa May's government would fall 16 seats short of the 326 seats needed to be first past the post to a ruling majority.
The pound was down against all its major rivals in early trade, down 0.4% against the dollar at $1.2812 and off 0.4% to €1.1454 versus the euro.
The latest YouGov data followed last week's survey by the same pollster that showed the Conservatives lead over Labour narrow to just 5 points – 43% to 38%.
A Survation poll for ITV's Good Morning Britain, around the same time, put the Tories nine points ahead on 43% to Labour's 34%.
Uncertainty dominates markets
Sterling bulls dislike uncertainty.
Before the election was called and while it looked like a Conservative victory was nailed on – between January and the shift in the polls in mid May – the UK currency rose 7.6% against the dollar.
Since the polls have started showing a shift in voter opinion, the pound has lost nearly 2%.
Jonathan Loynes, UK economist at Capital Economics, said: "A wider poll lead has generally been supportive for sterling on the basis it would allow Theresa May to resist the ultra-hard Brexiteers in her own party and make the path towards Brexit less bumpy."
The Tory lead over Labour has narrowed since the publication of the Conservative Manifesto – criticisms of the party's proposed social care reforms to make more people pay were branded a "dementia tax".
These criticisms prompted a hasty u-turn by May, who subsequently promised such reforms would be introduced with an "absolute limit" on the amount people would have to pay for their care.
Sterling was also under pressure from recent data that suggests the UK economic slowdown of the first quarter could be more prolonged.
Although purchasing manager surveys indicated a robust uptick in business activity in the first two months of the second quarter, Q1 growth was recently revised lower from 0.3% to 0.2%.
Wednesday's UK data appeared to confirm the slowdown in consumer activity. Net lending to individuals slowed in April to £4.5bn from £4.7bn in March, while consumer credit eased to £1.5bn from £1.62bn.
“If Q1’s slowdown is sustained or goes further in the coming quarters, the Bank of England will be prepared to look through the temporary rise in inflation and keep policy unchanged for a further prolonged period,” Loynes added.