The pound plunged during UK 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.
The sterling dropped to down to an eight-week low against the dollar and a seven-month low against the euro, before recovering later in the day. It reached a low of $1.2635 but then rebounded to $1.2770 in the early afternoon.
Investors viewed the result as a sign of Britain’s political instability and many are trying to see what this outcome means for Brexit.
The uncertainty regarding future Brexit negotiations and subsequent deals made remains to be one of the single most important factors in determining the direction of the pound.
However, May’s embarrassing failure to secure a Tory majority in the government could mean that a soft-Brexit is on the table again, which has some speculating that perhaps there is still the possibility to secure single market access and keep passporting rights.
The actual impact of the election result of the pound has not been as bad as many had forecast (likely for the reasons outlined above).
PIMCO’s head of sterling portfolio management, Mike Amey, was quoted by Reuters as saying: “Faced with this uncertainty, the immediate market response seems fairly reasonable: a modest sell-off in the pound.
“Looking ahead, assuming a base case of easier fiscal policy and a “softer” Brexit, we would expect…stability returning to the pound.”
But uncertainty still looms and Brexit talks are scheduled to begin shortly, on June 19.