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According to some experts, the pound's rally on the expectations of the Conservative Party victory in the upcoming parliamentary elections in the UK makes it vulnerable to a fall in the actual voting results.
Undecided voters will not need much effort to turn the strong majority of Conservatives into a weak one, they said.
The pound has risen by about 6% over the past two months, as investors see the Tory's potential victory only as a positive.
"We believe that the markets are far ahead of the events, laying down the quotes for Conservatives to receive a significant majority in the House of Commons," said Mark Dowding of BlueBay Asset Management.
"These elections remain quite unpredictable. Although the confident victory of the Tories seems the most likely result, we do not think that surprises can be ruled out, "he added.
The pound has been acting as a market barometer of political risk since the Brexit 2016 referendum. Having reached an almost three-year low in early September, the GPB/USD pair recovered on the expectation that British Prime Minister Boris Johnson's tactics for holding early elections could be justified if he manages to push through a "divorce" agreement with the EU through the national Parliament.
According to the latest YouGov poll, Conservatives can count on 42.6% of the vote and Labor on 33.8%.
Toronto-Dominion Bank estimates the probability of a major victory for the Conservative Party at 55%, but believes that this scenario has already been put in quotes.
"Confirmation of the confident majority of Tories can lead to a sharp upward movement in the pound, however, it is vulnerable to sell by fact against the background of profit taking and crowding out obsolete positions after the election results are known," said bank expert Ned Rumpeltin.
For strategists who bet on a Conservative victory, now it all depends on how many seats the latter can get: the more solid the majority of Tories are, the less likely it is that the Parliament will again be at an impasse and will not be able to approve the Brexit deal promoted by Johnson.
His predecessor, Theresa May, did not have a majority in Parliament and was forced to resign because her version of the Brexit deal was repeatedly rejected by lawmakers.
"A small Conservative majority is likely to ratify the divorce agreement, but Johnson may not have enough political freedom to extend the transition. In this case, the prospect of the absence of a trade deal at the end of 2020 will lead to a drop in the pound," said Andrew Wishart, a specialist in Capital Economics.
It is also likely that Conservatives will not get a majority in Parliament at all, which will open the door for Labour to form a coalition with small British parties.
Some market participants believe the Labour-led coalition is ultimately good for the British currency, since Labour leader Jeremy Corbyn has promised to keep the UK in EU Customs Union and put forward a new Brexit deal for a second referendum, but his leftist views imply that the pound may come under pressure in the short term. According to Kenneth Brooks, a strategist at Societe Generale, if this scenario is realized, a decrease in the rate of the British currency to $1.28 may follow.
Polling stations in the UK will open on Thursday, December 12, at 07:00 GMT and close at 22:00. The vote count will go on all night, and by Friday morning it will become clear whether the UK will have a chance in the near future to solve the Brexit dilemma and take a step forward, or whether the country will remain hostage to the "suspended Parliament".
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