Pound sterling falls by 2.5pc on Friday
London: Sterling tumbled as much as 2.5 percent on Friday, while the FTSE share index opened higher, after British voters denied any party a majority of seats in parliament, plunging the country into political chaos days before the start of Brexit talks.
With no clear winner emerging from Thursday’s election, Prime Minister Theresa May was fighting to hold on to her job on Friday, having failed to win the stronger mandate she had sought to conduct exit talks with the rest of the European Union and instead weakening her party’s grip on power.
The surprise of a result that raised questions about how Britain will advance with its plan to leave the EU, and whether any party can form a stable government, sent the pound to eight-week lows against the dollar and its lowest levels in seven months versus the euro.
After falling sharply on an exit poll released when polls closed at 2100 GMT, which indicated Britain was set for a hung parliament, the pound had steadied a little in Asian trading. But it fell sharply again as London traders arrived at their desks, as it became clear that no party had won a majority.
“The failure to secure political stability – and the outcome of a hung parliament – was always going to be the pound’s nightmare scenario,” said ING currency strategist Viraj Patel, in London. “Hopes that political uncertainty would decrease substantially under a more stable Conservative government…(have) been all but dashed.”
“With the two-year Article 50 clock ticking, the passage of time is sterling-negative,” he added, referring to the formal Article 50 process by which Britain is set to leave the EU. “A working government is needed as soon as possible to avoid a further drop in the pound.”
FTSE GETS A FOOTING
Spreadbetters had earlier suggested that London’s main FTSE 100 stock index could fall as much as 1 percent on the election result, but the index – which is composed of companies that largely earn in foreign currencies, and which therefore tends to climb when sterling falls – climbed 1 percent.
The more domestically focused FTSE 250 index, however, fell 0.6 percent.
British gilt yields were broadly flat, having earlier fallen as investors sought the security of government bonds in the face of the uncertainty.
Sterling fell to as low as $1.2636 in London trading, its weakest since April 18.
“This is not the kind of outcome which investors were looking for,” said ThinkMarkets analyst Naeem Islam, in London. “Although Theresa May has won the election, in reality, it is Jeremy Corbyn who has made substantial progress. This clearly opens the way towards $1.22 in coming weeks.”
Against the euro, the pound fell to as far as 88.60 pence, its weakest since the U.S. election results on Nov. 9.
Investors’ traditional views of whether the Conservatives or the opposition Labour party would be good or bad for the pound 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” markets have worried May would deliver.
“While some have argued that a softer Brexit might ameliorate the downside, there is still the prospect of the contents of the Labour party manifesto,” said Michael Hewson, chief analyst with CMC Markets in London.
“This could well see the pound come under further pressure.”
