British pound pounded post-election

Sterling down: Stacks of British pound are seen at a money changer in Singapore. The pound also fell against other major currencies, including the US dollar by 1.85 to 1.2716, the euro by 1.56 to 1.1371, and the Chinese yuan by 1.78 to 8.6459. — AFP

THE British pound has fallen sharply against major currencies around the world, including the ringgit.

The pound’s decline follows the election in the United Kingdom which has resulted in a hung parliament due to the Conservative Party being unable to secure a parliamentary majority.

The currency weakened by some 1.86% against the ringgit to 5.4294 at 5pm yesterday.

This is the lowest level recorded for the pound since March 15, 2017.

It also fell against other major currencies, including the US dollar by 1.85% to 1.2716, the euro by 1.56% to 1.1371, and the yuan by 1.78% to 8.6459.

UK stock futures also indicated a lower opening after the shock results of the election called by Prime Minister Theresa May.

Investors had expected and priced in a comfortable win for May’s Conservative Party, but the Labour Party made strong gains by winning 261 seats, with the Conservatives’ position weakening.

The Conservatives won 318 seats against the 326 seats needed to secure a majority in parliament.

This scenario has caused more uncertainty in the UK’s political landscape, analysts say.

Schroders Research in a note says that the Conservative Party is the largest party in parliament and will likely seek to form a minority government.

Concerns now hover around the stability of the government that will be formed, given the minority status of the Conservative Party.

“This suggests a less stable government, one that will have to make concessions and seek a consensus even when introducing simple changes to legislation,” Schroders’ senior European economist and strategist Azad Zangana says.

Zangana adds that this is a disastrous result for the Conservative Party, which will raise some questions over the future of May as Prime Minister.

“As the largest party following the election, the Conservatives are likely to remain in power as a minority government, relying on the confidence and supply of votes from friendly opposition members of parliament,” he says.

Standard Chartered (StanChart) Research in a note says that it does not discount the possibility of a second election, given the uncertain outlook and noting that the higher turnout among young people appears to have boosted the Labour Party’s vote.

Moving forward, StanChart Research says investor perception of the incoming government’s Brexit strategy could be a key driver of the pound.

“Additional political uncertainty may damage sentiment, and UK monetary policy is likely to stay very accommodative, especially as growth momentum has slowed in recent months.

“Our expectations of a wait-and-see approach from the Bank of England (BoE) represents a dovish contrast to the US Federal Reserve and European Central Bank, and is negative for the pound against the euro and the US dollar,” StanChart Research says.

The research house expects a decline in the pound to the US dollar to 1.24 and a rally in the euro to the pound to 0.90 by end-2017, with downside risks to these forecasts.

Zangana says the fall in the pound has been “smaller than expected”, given the hung parliament.

“At the margin, the lower sterling pound will push up inflation a little further than previously forecast, which will have a small negative effect on household spending.

“The BoE is unlikely to change its policy in the near term, but will offer reassurance that it stands ready to act in the event of financial instability,” he says.

“Looking ahead, there is a high chance that any Conservative minority government may not last beyond a year. It will likely struggle to pass any finance bill,” he adds.

StanChart Research says the June 19 date for Brexit talks to begin could be pushed back now, given the election outcome and noting too that the new government would have to quickly regroup for these negotiations.

“The clock has been ticking since Article 50 was triggered on March 29. The deadline for the conclusion of negotiations, effectively October 2018 (to allow time for the deal with the European Union to be ratified by the European Parliament and national parliaments), cannot be extended,” it says.


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