British Pound Steady Despite Looming Hung Parliament

Talking Points:

  • The British currency fell on initial exit polls, but has slid no further as they’ve been proved correct
  • No single party is on course for a majority
  • Horse trading may mean a “softer Brexit”, which could be supporting Sterling

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The British Pound fell sharply in the Asia/Pacific Friday on the shock prospect of a “hung parliament” in its home country’s general election, but has steadied since even though that prospect looks all-but certain.

The incumbent Conservative Party under Prime Minister Theresa May is now extremely unlikely to get the 326 seats it would need for a majority of even one seat in the 650 seat House of Commons, and major broadcasters have called that “hung Parliament”.

This will leave all parties locked in negotiations to see whether any possible grouping can form a government in the coming days. Given the bad feeling engendered by the last coalition between the Conservative Party and the smaller Liberal Democrats, which governed in 2010, a resumption of that partnership seems unlikely.

Whoever wins the horse-trading will, on current time-tabling, have to begin negotiations with the European Union on the terms of Brexit within ten days. This now looks like an impossible schedule and, indeed, the UK may be obliged to return to the polls if no sustainable majority grouping can be formed.

GBP/USD fell from $1.29 to the $1.2698 area at some point. However, lack of inclination to fall further and its stability since, is perhaps puzzling given that a hung parliament was widely touted as the markets’ worst nightmare before the fact.

British Pound Steady Despite Looming Hung Parliament

It is possible that investors believe that some way will be found for the Conservatives to remain in office, avoiding a premiership for Labour leader Jeremy Corbyn. His policies are viewed as far less market friendly. It may also be the case that markets now foresee a “softer” Brexit, or perhaps even another referendum on the subject – again supporting the Pound.

Another likely Sterling support could be awful performance of the Scottish National Party, which favors independence for Scotland. It seems likely now that the UK will at least remain whole for the foreseeable future, which may have helped the currency.

— Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX

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