The British pound rose sharply late Thursday as early exit polls from the British election pointed to a strong victory for Boris Johnson’s Conservative Party.
The pound surged 2.5% against the dollar to $1.3467, its highest level since May 2018. The euro also rose 0.4% against the dollar, buying $1.117, as Mr. Johnson’s victory was seen as likely to bring some near-term certainty to the U.K.’s exit from the European Union. The Brexit process has dogged the region with uncertainty for more than three years.
“It’s not just that he’s got a majority it’s that he’s got a sizable majority,” said Peter Kinsella, global head of foreign exchange strategy at Swiss private bank UBP. “That indicates were going to get a swift ratification of the Brexit agreement.”
The pound is often seen as a barometer for the U.K.’s political fortunes and the effect the U.K’s exit from the EU will have on the economy. Mr. Johnson’s Brexit plan is set to take the U.K. out of the EU by Jan. 31.
The EU-U.K. trading relationship will remain unchanged at least through the end of 2020 under the plan as Brussels and London hash out a long-term agreement over immigration, tariffs, and financial flows.
Before the election, market observers expected a Johnson victory to boost the pound and U.K. stocks.
ING Bank expects the pound could hit 1.35 against the dollar if there is a Conservative majority, The bank had expected the pound would fall to $1.26 or $1.24 against the dollar if there is a hung Parliament or Labour Party majority, respectively. Citigroup predicted that sterling would reach $1.40 against the dollar in 2020, bolstered by a Conservative majority bringing certainty to the market.
The signs of a clear Conservative victory add to a sense that major overhangs on global markets could be lifting. The exit polls came hours after indications that President Trump would sign off on a limited agreement aimed at ending the trade war with China. The move would prevent new tariffs planned for Sunday and roll back some existing tariffs.
“Things are pretty rosy right now,” said Richard Falkenhäll, senior foreign exchange strategist at SEB Group
U.K. markets have been under a cloud of Brexit uncertainty since the June 2016 referendum. The pound fell sharply after that vote and remains well below where it traded before the referendum.
Stocks have broadly underperformed the rest of the world. This year, U.K. stocks have lagged behind rivals in the U.S., France and Germany. Some investors were betting that a Conservative victory could change that narrative.
Banking on a Conservative victory, Phil Harris, a fund manager for EdenTree Investment Management’s U.K. equity growth fund, bought shares in British telecommunications company BT Group PLC ahead of the election. He increased his holdings from 1% to just under 2% of the fund, figuring Labour candidate Jeremy Corbyn calls to nationalize part of the company if elected prime minister were weighing on the shares.
Paul Flood, portfolio manager at Newton Investment Management, added to his fund’s position on U.K. domestic banks in recent months.
“U.K. banks are attractive,” he said. “They have strong balance sheets built up of conservative mortgage lending.”
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Anna Isaac at anna.isaac@wsj.com
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