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Great Britain Pound and Red Arrow

Sterling slides after UK election shock


Date of publication: June 9, 2017 | Author: Tim Clayton

Sterling has fallen sharply after the UK election result. There will be prolonged political and economic uncertainty which will weaken the UK currency.  For those needing to buy overseas currencies, it will make sense to use any corrective recoveries to sell the UK currency or take out a forward contract.

After UK polls closed on Thursday, exit polls suggested that the Conservative Party would be the largest party in the House of Commons, but would not win an overall majority. Sterling came under heavy selling after the exit-poll release with GBP/USD sliding to near 1.2700 while EUR/GBP moved above 0.8800.

Markets were expecting a Conservative majority and Sterling was sold heavily as the result failed to meet expectations.

The actual results confirmed that the Conservative Party has not won a majority. The latest projections indicate that the Conservatives will gain 318 seats compared with the 326 needed for an overall majority with the opposition Labour Party on around 265.

http://www.bbc.co.uk/news/election/2017:  There is scope for the Conservative Party to form a minority administration and rely on minor parties for support, although there will be a very high degree of uncertainty. The authority of Prime Minister May has certainly been severely weakened even if she is able to form the next government.

There will be speculation that she will be forced to resign from the Conservative Party leadership within the next few days and there is also an important risk that there will be another General election within the next few months.

There will be a high degree of uncertainty surrounding EU exit negotiations and there have already been comments from EU Commissioner Oettinger that the talks may have to be delayed due to the difficulties in gaining an acceptable result.

Any delays would increase fears that it will be even more difficult to secure a deal within the 2-year timeframe.

These negative factors will undermine Sterling in the short term. There are, however, also factors which could support the UK currency. The currency remains cheap in historic terms which will provide support.

There will also be speculation that the UK will be forced to drop its insistence on a ‘hard’ Brexit which could provide some degree of relief surrounding the longer-term economic implications. In this context, the stance of EU countries and negotiators will also be very important over the next few weeks.

There has also been a big shift in Scotland with sizeable losses for the Scottish National Party (SNP) to parties which favour maintaining the Union. These SNP losses will make a second Scottish independence referendum much less likely which would tend to support Sterling.

The Bank of England will not be making any statement or provide market support ahead of next week’s Monetary Policy Committee meeting. There will not be any immediate changes to economic policy, but there will still be a very important element of uncertainty surrounding the longer-term outlook, especially given the risk of a change in key government personnel.

Markets tend to dislike uncertainty and this big element of uncertainty will tend to undermine Sterling support with events also damaging international confidence in UK assets.  

Inevitably, there will also be a high degree of volatility surrounding Sterling over the next few days at least.

 

 timTim Clayton is a market analyst with more than 20 years of experience in the financial markets, with particular focus on currencies. Holds an economics degree from University of New York. Writes for multiple publications including Investing.com and SeekingAlpha so he is on top of all the happening in the world of currencies and macro-economics. 

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