With opinion polls suggesting that Thursday’s General Election might not deliver a clear victor, markets appear to be accommodating the prospect of a hung parliament. Although it remains elevated, the implied volatility of the pound against both the euro and the dollar has fallen back a little over the last few days. Moreover, sterling has rallied against the USD with a rise from $1.46 in mid-April to $1.52, while firming euro area prospects have seen it hover around €1.35. Although Gilt yields have risen sharply over the last week, this primarily reflects a general backup in global rates. To the extent that Gilt yields have outperformed their US counterparts, this appears to be largely driven by a reassessment of the relative prospects for the timing of the first policy rate hike. “It is worth noting that much of the market reaction to the 2010 election took place during the post-vote negotiations which led to the formation of the governing coalition. If the current polls are correct, any discussions this time around could prove to be far more protracted and possibly inconclusive.” notes Lloyds Bank in a report
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