Election results: Poll result electrifies markets, but fears over British EU exit remain

'For now the bulls are running riot – and the UK’s robust economic position is firing demand for sterling that could push the pound even higher'

The markets responded positively to George Osborne's return to No 11 Downing Street (Getty Images)

David Cameron’s shock victory for the Conservatives triggered a huge relief rally for the pound despite warnings over the potential impact of a looming “Brexit” referendum on the EU and a possible fresh vote on Scottish independence.

Sterling saw its biggest one-day rise against the euro since the depths of the eurozone crisis in 2011, gaining more than 3 cents against the single currency to highs of €1.3840 at one stage. Against the dollar, the pound hit more than 1 per cent to a three-month high of $1.5523.

David Lamb, head of trading at forex dealers Fexco, said: “For now the bulls are running riot – and the UK’s robust economic position is firing demand for sterling that could push the pound even higher.”

The Conservatives’ plans to eliminate the deficit by 2017/18 entails lower borrowing over the course of the next parliament. That in turn implies better news for the pound as the UK’s high current account deficit of 5.5 per cent – the broadest measure of the nation’s financial standing with the rest of the world – should fall more sharply, reducing potential downward pressure on sterling. Adam Myers, European head of FX strategy at Credit Agricole, said: “Viewed within the context of the UK’s large current account deficit, the policy uncertainty removed by today’s result will be a relief for some previously nervous foreign investors.”

The relief also spread to shares as London’s FTSE 100 Index added 2.32 per cent to 7046.82, adding £41bn to the value of London’s leading shares and putting the blue-chip index on course for new record highs. The value of UK gilts also shot up, before giving back some of the gains.

But other experts immediately pointed to risks from the Conservatives’ pledge for a 2017 referendum on the UK’s membership of the EU. Labour warned this could shroud economic prospects – and the future of the UK’s trading relationship with its biggest trading partner – in uncertainty for the next two years.

George Buckley, chief UK economist at Deutsche Bank, said: “Sterling has rallied on the back of the Conservatives’ outright win, but looking further ahead we see risks to the currency on account of the EU referendum. The risk of Brexit – lower inward investment during the run-up to the referendum and lower interest rates than would have been the case under Labour – all point to potential downside risks to sterling going forward.”

The crushing victory of the SNP, meanwhile, raised concerns that markets would be unsettled by momentum behind a new independence referendum despite last year’s No vote and despite Mr Cameron’s pledge to devolve new powers to Scotland and Wales.

BNP Paribas UK economist Dominic Bryant said: “With the SNP cleaning up in Scotland, but not being part of the government in Westminster, it is easy to see the SNP being able to play up the idea of the Union not working for Scotland. Pressure for a second independence referendum in Scotland may grow. These internal political tensions could also have spillovers on markets.” Lena Komileva of g+ economics said: “This election result will have long-lasting, fundamental and possibly structural implications for the UK.”