Good morning,
May we live in interesting times
As you probably well know politics in the UK have created another astounding atmosphere with parliament hung. The Tories are the largest party but are now unable to form a meaningful majority following gains for Labour and the Lib Dems.
We will leave the political ins and outs to the Westminster hounds but instead focus on what this means for the pound and Brexit.
Could politics turn to be sterling’s friend?
Back in 2010, sterling reacted negatively to an exit poll that showed a hung parliament and it is doing the same again this morning. We believed eventual confirmation of a hung parliament could have prompted as much as a 2-4% decline in GBP across the board; GBPUSD at the time of writing is down around 2% across the board.
As it stands at the moment though this election is posing more questions than answers. With the make-up of the parliament still very much in flux, there are a lot of questions around policy moving forward and none more important than Brexit.
As we interpret it now, and buoyed by a change in voting dynamics that suggest that the youth have finally turned up, we may now see a cogent defence of the Remain position within Parliament and a subsequent shift away from the antagonistic negotiation techniques that have gone before. That does not mean that Brexit instantaneously becomes ‘softer’.
Positivity? Really?
There are very few ‘Buy’ recommendations out there on sterling but this vote could easily represent an inflection point to the positive on Brexit and that will help the longer term prospects of the pound. It may need a general election fought on the prospect of a softer Brexit to get it going though.
In the short term we must be cognisant that there is also the factor that we triggered Article 50 a couple of months ago and any delays that may be needed to put a negotiating architecture back together again simply eat up time that we do not have.
At the end of the day the be all and end all is that once again the British people have spoken but we are not quite sure what they have said yet.
What now today?
There is very little reason to hold the pound over the weekend and as I type, fresh lows continue to be made. While Theresa May has said that she will not resign sometimes this decision is not that person’s to make and rumours abound. The onus is with the Tories as the largest party and any coalition agreement with the DUP in Northern Ireland will be closely watched given the tinder box that the border between the two countries could prove to be.
As the pound traded overnight seat by seat, so it will now trade headline by headline.
Have a great day and a better weekend.