British elections: Pound falls sharply as hung parliament becomes a reality

rub-l12In yesterday’s UK general elections, the Conservative party did not come out as strong as initially thought earning a weaker representation in the House of Commons while Jeremy Corbyn, the Labour party leader who was credited for running an energetic campaign, managed to beat expectations securing enhanced parliamentary representation for his party.

Projections now as votes are still being counted are that the Conservatives will be the largest party with 318 seats, eight short of a majority – the total number of seats is 650. The Labour party is expected to follow with 261 seats (262 is a possibility as well as the final votes are being counted). In the absence of an overall majority, a hung parliament reality with the Conservatives trying to form a minority government is expected to be the most likely outcome. Such a scenario could lead to a period of instability for the nation, exactly the opposite Prime Minister Theresa May had wished for.

Jeremy Corbyn called for May’s resignation, saying “The mandate she has got is lost Conservative seats, lost votes, lost support and lost confidence.” One positive for May was the Conservatives’ strong performance in Scotland, as the party gained on Scottish National Party weakness. The SNP losing a significant number of seats is likely to have negative implications for SNP leader Nicola Sturgeon’s efforts for another Scottish independence referendum.

The pound tumbled as the first polls released at 21:00 GMT last night showed that a majority in Parliament could not be won by the Conservatives. This is to say that currency markets were expecting a clear victory by PM Theresa May’s party and rapidly reacted to those expectations not materializing. Specifically, relative to the dollar and as the polls hit the markets, sterling recorded a steep fall from $1.2950 to as low as $1.2704, a 1.9% decline. At the same time the euro rose from 86.54 pence to 88.24, a near 2.0% rise. In morning European trading hours pound/dollar was trading below the 1.27 handle and euro/pound at 0.8815.

Brexit negotiations are due to begin in just over a week and Theresa May supposedly called on snap elections in the first place to strengthen her government’s positions in the negotiations. Now the election outcome further complicates things for the UK and puts May’s future as Prime Minister in doubt. It could be argued that this is likely to lead to further losses for the pound, however May’s “hard Brexit” rhetoric might now be challenged and a “softer” Brexit with potentially single market access could help the pound recover from losses. PM May will be giving a speech at 09:00 GMT.

Origin: XM

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