Pound battered as Labour closes the gap on Theresa May

Fears of an election shock hit the pound on Friday as Theresa May’s poll lead over Labour’s Jeremy Corbyn narrowed dramatically.

As campaigning resumed, a YouGov poll — the first since Monday’s terror attacks in Manchester — put the Tories on 43% and Labour on 38%, drastically down on the 24-point lead enjoyed by May at the beginning of the election race.

With less than two weeks to go until polling day, sterling fell by almost a cent against the dollar, hitting lows of $1.2861.

It also dropped three-quarters of a cent against the euro to €1.1478 at one stage following the poll, which comes after the PM’s screeching U-turn on her social care plans earlier this week.

The currency’s weakness propelled the FTSE 100 to new intraday highs of 7535.06, as a weaker pound enhances the value of the internationally focused blue-chip index’s overseas earnings.

Market-watchers said the YouGov poll followed the trend of a steadily narrowing Conservative lead even before the publication of its manifesto a week ago.

Nomura’s Jordan Rochester said: “It is just one poll but we can’t help noticing the trend in all the other polling companies as well.

“The market is not talking about ‘what if Labour wins’, they are talking about what happens if Theresa May does not achieve her big majority. If you get the same sort of majority as she had before then it makes the election pointless.”

If carried through on polling day, a 5% lead barely gives May a majority, Rochester added, leaving the PM vulnerable to the Brexit hardliners on her own backbenches as well as a potential “coalition of the Left” led by Corbyn. “This is an unlikely tail-risk now coming onto the market’s radar which is being reflected in sterling,” Rochester added.

CMC Markets Michael Hewson said the pound could sink to “$1.20 or lower” on a Corbyn win. “At the beginning of the week May was doing badly but she’s now making a Marxist look electable.”

Spreadex’s Connor Campbell added: “Any growth managed by sterling since April has largely been predicated on the assumption that the Conservatives would secure a landslide victory. That this presently doesn’t seem to be the case has helped further erode confidence in the currency’s present position.”

The pound’s slide comes after a week of poor economic news for May: new official estimates cut the UK’s growth performance between January and March. Public borrowing also jumped in April, and the squeeze on consumers’ wallets is tightening after inflation rocketed ahead of wage growth to its highest level since 2013 and as Britons prepare to vote.