GBP/USD rose to seven-month highs amid increasing chances of the Conservative Party winning early Parliament elections in the UK on December 12.
According to recent polls, Tory's separation from Labour rose by more than 10% compared with 9% a week ago.
"The bullish movement of quotes shows: market participants are more and more confident that Conservatives can get a majority on Thursday. However, as soon as the initial euphoria disappears, it will be more difficult for the pound to continue its growth in 2020," MUFG experts say.
They do not exclude the possibility that British Prime Minister Boris Johnson will need an extension of the Brexit transition period, which expires at the end of next year, which will open the door for the country to leave the EU without a trade agreement.
"The current pound exchange rate implies the belief that Brexit will really happen and some kind of trade deal will be closed in 2020. However, uncertain times may still come, even if Thursday's result brings some temporary relief from the majority of the ruling Conservative Party (as polls show)," said Michael Metcalfe of State Street Global Markets.
The GBP/USD pair reached its highest level since May, rising to 1.3180 on Monday.
"The pound may continue to rise against the US dollar on Tuesday if the Conservatives strengthen their leadership over the Labour Party following the publication of a YouGov poll," BMO Capital Markets believes.
Today, YouGov will unveil its second and final multilevel regression and post-stratification survey, which successfully predicted the 2017 election results.
"If the gap between Conservatives and Labour is 11% or more, we expect continued growth of GBP/USD," said BMO strategist Stephen Gallo.
"The pound is now trading with a clear preference for Conservative victory in the upcoming elections, but this outcome is far from certain," RBC Capital Markets warned.
"There are several serious uncertainties, namely: voter turnout (especially among younger voters), potential tactical voting, and a large proportion of voters who are still undecided in the polls that polls still reveal. The pound's last jump, which would entail the victory of the Conservatives, is likely to mark the British reaching a local peak, as markets will move on to other Brexit risks," said RBC expert Adam Cole.
According to Matthew Cady of Brooks Macdonald, any rebound in the pound, stocks and UK government bond yields amid the Conservative Party gaining most seats in the House of Commons in the December 12 elections will only be a short-term relief.
"The attention of the markets will quickly return to uncertainty regarding the ability of Great Britain to agree on new trade relations with the EU. They will be allotted only 11 months after the expiration of the Brexit deadline on January 31, when the transition agreement agreed by Johnson and the EU comes into force," the analyst said.
"The United Kingdom may face another deadline, now December 31, 2020, and there is a risk of a return to WTO rules with the EU if by the end of next year the issue of maintaining the country's membership in the trade union is not resolved or new trade agreements appear" - he added.
