The pound raced to a seven-month high against the dollar on Wednesday as City traders bet that Boris Johnson was on course for victory in the general election.

Sterling jumped above $1.30 to hit 1.311, its highest level since May, while the euro rate moved above €1.18 from close to parity in the summer when the Conservative leadership contest triggered a fresh round of Brexit uncertainty.

A rolling average of opinion polls gives the Tories an 11% lead over the Labour party, which would be enough to command an overall majority in parliament.

Joshua Mahony, a senior market analyst at the spread betting firm IG, said Labour had narrowed the gap with the Conservatives in recent days, but the improvement was only slight.

“While we have seen gains for the Labour party, there is a feeling that it may be too little too late, as we stand just eight-days from election day,” he said.

“From a market standpoint, a Conservative majority would likely come with a sharp surge in the pound, and thus the upside we are seeing in sterling reflects the market willingness to take on some risk with a view to getting into this GB pound trade early.”

Stock markets also recovered some lost ground after comments by Donald Trump that appeared to be more positive about trade talks with China, compared with his gloomier prognosis earlier in the week that pushed a deal back to 2021.

The German Dax and the French Cac 40 pushed higher by 1.2% and 1.3% respectively, while the New York Dow Jones industrial index was up almost 200 points to 27,697 in early trading on Wednesday.

But the index of top shares in London only inched ahead after fears that the UK economy was on course to record a second quarter of negative growth this year were heightened by a business survey that showed the services sector shrank last month.

The FTSE 100 closed at 7188, up 0.5%, after a bumpy day during which the index dropped to 7,143 in early trading before rising in the final minutes after Trump said talks were “making progress”.

A report by IHS Markit and the Chartered Institute of Procurement and Supply of the UK services sector said export orders fell at the fastest rate since the survey began in 2014, as businesses reported Brexit uncertainty had deterred foreign companies from buying services from UK suppliers.

A broader measure of new work decreased for the third consecutive month in November, with the sector contracting at its sharpest rate in more than three years.

The combination of weak domestic and foreign orders meant the IHS Markit/Cips UK purchasing managers index (PMI) slipped back to 49.3 from 50 in October. A figure below 50 indicates contraction.

Conducted each month, the survey covers a representative panel of about 700 companies across the services sector, which includes banking, accountancy, IT, and the hotels and leisure industry.

Tim Moore, a senior analyst at IHS Markit, said this survey, along with previous PMI surveys of the manufacturing and construction sectors, showed the UK economy was “staggering through the final quarter of 2019”.

Gross domestic product shrank in the second quarter by 0.2% before recovering in the third, during which it increased by 0.3%. Moore said the slide across all major private sector industries was consistent with GDP declining by 0.1% in the final quarter of 2019.

Ruth Gregory, a senior UK economist at the consultancy Capital Economics, said the data would put pressure on the Bank of England’s monetary policy committee to cut interest rates, but the MPC was only likely to act if the result of the general election on 12 December produced further uncertainty and the economy continued to contract.

“The weak tone of this survey is likely to give more ammunition to the doves on the MPC who think interest rates need to be cut,” she said.

“But if there is a clear election victory and a Brexit deal by 31 January – and as long as the economic data doesn’t weaken significantly – we suspect that the Bank will keep rates on hold at 0.75% in December and January.”

Mahony said there were likely to be ups and downs in the US-China trade talks but a conclusion was likely in the first half of next year.

“Neither the US nor China are interested in overseeing another year of economic uncertainty, and with the impeachment hearing ongoing, there is no doubt Trump will be desperate to get a deal across the line to shift the focus ahead,” he said.