Sterling
Sterling suffered dramatic losses on Thursday evening when exit polls suggested Theresa May had lost her parliamentary majority. The exit polls proved correct, meaning that for the second time in less than a year an ill-fated vote has left Britain, and the Pound, shrouded in political and economic uncertainty.
Defiant, May has decided not to resign but political commentators on both sides of the spectrum, and indeed members of her own Conservative party, believe that the Prime Minister’s position is ultimately untenable.
Having initially called a snap election to gain a strong majority in order to strengthen her hand in the upcoming Brexit negotiations, May is now left with a potential minority government reliant on the support of the socially conservative Northern Irish Democratic Union Party (DUP). With Britain’s trade talks with the EU due to start in a matter of days, May’s leadership looks anything but strong and stable and investors have little faith in her ability to achieve a positive deal for Britain.
The fear of a bad Brexit deal has prompted traders to sell the Pound as political uncertainty reigns supreme.
Euro
The Pound to Euro exchange rate slid 180 pips to strike a seven-month low on Friday following the shock UK general election result.
Strangely, Sterling did not sustain any significant losses after the initial selloff (when the exit polls were released projecting a hung parliament). Within the maelstrom of political postulating that has occurred since the vote, one of the theories that has gained traction is the view that the British electorate voted against May’s vision for a Brexit without continued access to the EU single market. If this argument were to gain credence then it could re-open the door to a so-called ‘softer Brexit’ and subsequently lead to a positive revaluation of Sterling.
At this point, however, it is very difficult to predict how long the Prime Minister will remain in power for, let alone how she / her successor will conduct Brexit negotiations. Even harder still is the task of predicting how EU chief negotiator Michel Barnier will respond to Britain’s attempts at forging a positive deal.
US Dollar
‘Cable’ depreciated by around two cents to hit its lowest level in almost two months following the mayhem of last week’s election results.
But what next for GBP/USD? The immediate outlook looks negative: there is simply too much uncertainty for Sterling to mount a significant rally at this stage. The US Dollar, meanwhile, is likely gain some support later in the week as the Federal Reserve looks set to raise interest rates. Any hawkish hints at future policy tightening would likely cement the ‘Greenback’s’ gains.
While Britain remains mired in uncertainty, Sterling may struggle to avoid depreciations against the majors. However, if it turns out that the chaotic election result persuades the British government to pursue a future inside the single market then it could actually prove supportive to the Pound in the long run.
Canadian Dollar
The Pound to Canadian Dollar exchange rate has lost around 350 pips since the British election, with Sterling striking its lowest trough since the middle of April. The ‘Loonie’, for its part, was boosted by news that 77,000 full-time workers were added to payrolls in Canada in May. The robust figure marked a significant rebound on April’s drop of 31,000.
However, GBP/CAD bounced higher when it hit support at April’s low and technical analysis suggests we could see the Pound hold above this level over the next week.
Australian Dollar
Sterling plummeted by around two-and-a-half-cents to strike a two-month low against the Australian Dollar on Friday as traders reacted negatively to news of a hung parliament in the UK.
Uncertainty is the word of the day, but some traders believe the surprise election result could pave the way for a softer approach to Brexit, which would likely lend Sterling a leg-up in the long run. Alternatively, other investors suspect that Theresa May’s fragile position will embolden hard Brexiteers among the Conservative party who wish to cut ties completely with Europe. This could see further falls for the Pound if it emerged that Britain was heading for Brexit without a well-worked new trade deal.
New Zealand Dollar
The Pound weakened by around three cents against the New Zealand Dollar on Friday, falling to lows not seen since the middle of March as political uncertainty crushed investors’ appetite for Sterling.