Pound dives as UK plunges into new period of uncertainty

The pound plunged during United Kingdom election night shortly after an exit poll correctly forecast that prime minister Theresa May's Conservative party would fall short of winning a parliamentary majority.

"As long as the debate rages about whether Britain will end up with a hard or a soft Brexit, the volatility will continue".

Bets that another drop in sterling would flatter global firms' profits pushed London's FTSE as much as 1 percent higher but it was up a more limited 0.4 percent by mid-session.

The pound shed more than 2 percent against the dollar, dropping as low as $1.2636 and 88.6 pence per euro - two- and six-month troughs - before recovering all the way to $1.2741 and 87.70.

Challenger banks Metro, OneSavings and Aldermore, which analysts said were most sensitive to domestic growth, fell particularly sharply. Housebuilders Taylor Wimpey, Barratt Development and Persimmon all fell and UK-focused banks RBS and Lloyds were also weaker.

"However, we believe that upside potential remains capped".

On the bond side, 10-year gilt yields have risen 2.5% to 1.057%, but they remain almost 15% down year-to-date.

Mohamed El-Erian, chief economic adviser at Allianz, said: "With initial exit polls pointing to the Tories 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". "People are pushing it back to perhaps 2020", said Marc Ostwald, a strategist at ADM Investor Services.

Sterling fell against the U.S. dollar earlier in the mornign, following exit polls last night suggesting a hung parliament was the most likely outcome, and fluctuated throughout the night as incoming results went on to confirm the Conservative party had lost its majority.

Sterling has been trading in a range between $1.28 and $1.30 in recent weeks.

He predicted a hung parliament would strip the pound of all the gains made since the election was called and leave it wallowing around $1.2500.

The currency has been highly volatile in the last year, from $1.50 a year ago before the Brexit vote to below $1.18 briefly in October.

As the dust settles, one issue will dominate investors' concerns above all: whether Britain is more or less likely to retain privileged access to the EU's single market, the destination for most of the country's exports.

Above all, investors are anxious about the general uncertainty surrounding the country - whether a bruised May will resign in due course, whether the Conservatives will be able to form a new government or whether it will be an alliance of opposition parties, led by the Labour Party. There's also the question of whether a so-called "hard" Brexit is now off the cards, and maybe markets will be relieved if that proves to be the case.

"If you were going to seek protection via the options market.you'd have to have a view on how quickly that would happen - you have to pick a maturity for your option - and that's very unclear", said Gunner.

  • Zachary Reyes