Sterling drops as May seen falling short of majority

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By Patrick Graham

Sterling saw its biggest daily fall since January before recovering some ground on Friday after an exit poll unexpectedly showed Prime Minister Theresa May losing her parliamentary majority in Britain’s election.

The shock of a projection that raised questions about how Britain will advance with its plan to leave the European Union, and whether any party could form a stable government, sank the pound initially by almost 2 percent against both the dollar and euro.

But with results still showing a chance of a small majority for May’s Conservatives, and analysts pointing to the chances of a “softer” Brexit under an alternative Labour-led coalition, the pound later recovered some ground.

“The initial exit poll … was a shock, so there was a sharp fall,” said a trader with one Japanese bank in Singapore.

“But now forecasts have changed…and so a (Conservative) majority might not be out of the question. It’s just because there is some hope that the chances of a hung parliament might be receding.”

By 0155 GMT, sterling was 1.3 percent lower on the day at $1.2785 – having fallen as low as $1.2705 – and 87.59 pence per euro.

With trading volumes extremely thin out of London hours, London stock exchange futures fell around 0.3 percent, while 10-year UK government bond yields dipped 5 basis points to below 1 percent.

The move on gilts suggested shocked investors will seek the security of bonds when markets reopen properly in London on Friday.

Mohamed El-Erian, chief economic adviser at Allianz, said: “With initial exit polls pointing to the Tories (Conservatives) losing seats and that Prime Minister May’s early election gamble is not paying off, markets are pricing in a more complex outlook for policy implementation, including Brexit.”

PRAYING

The exit poll predicted the Conservatives, traditionally favoured by markets as pro-business and fiscally prudent, would win 314 seats in the 650-member parliament and the opposition Labour Party 266, meaning no clear winner and a “hung parliament”.

A raft of analysts predicted more falls for the pound if the results were confirmed.

“The market will be praying that this exit poll has got it wrong,” said Lee Hardman, a currency analyst with Japanese financial giant MUFG in London.

“Currency volatility is the best proxy for market fears. If the Conservative ship is sinking then the market will be looking for a life boat.”

Investors’ traditional views of whether the Conservatives or Labour would be good or bad for the pound, however, have been muddied in this election, not least by the prospect of Brexit talks due to start on June 19.

Some banks have said a high-spending Labour government could spur economic growth and cause the Bank of England to raise interest rates more quickly.

Some also argue that any Labour-led coalition might aim for a softer deal on Britain’s planned departure from the European Union than the “hard Brexit” that markets have worried May would deliver.

“The pound is getting hit … and that’s probably a symptom of uncertainty,” said Jason Ware, chief investment officer at Albion Financial in Salt Lake City, Utah.

“But if we get more of a softer Brexit or more of a globalist stance from the UK… it’s good for Europe, the UK and U.S. assets.”

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Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]