British Pound Plunges into Uncertain Territory with Hung Parliament Result

Posted by Allison on 13 June 2017, 14:43

Prime Minister Theresa May decided back in April to call a General Election for 8th June. Many experts had recommended this should happen while her approval ratings were high and the chances of achieving a greater majority looked all but certain.

What a difference a few months makes in politics. The same would seem to be true of the currency markets, too. The idea of a clear win by the Conservative government even led the markets to price in a win on the previous day. For example, the British pound was trading at 1.2906 against the US dollar going into Wednesday evening, and by Thursday evening, when polling was taking place, this had risen to 1.2943. 

But by the time the result became clear, and a hung parliament was announced early on Friday, the pound had a very difficult day to endure (as did the Prime Minister). By Friday evening, the pound had sunk by nearly 1.5% against the US dollar, dropping to 1.2752 as it did so.

The picture was just as bleak elsewhere, too. It traded at 1.7357 against the Canadian dollar on Wednesday evening, before rising to a healthy 1.7491 on Thursday. But again, the reality of the election hit home and sent the pound tumbling to 1.7227 on Friday night – a drop of over two and a half cents in this instance.

We would expect it to drop against the euro in this situation too, and indeed it did. With the Brexit negotiations due to begin in little over a week, the result saw the pound drop against the single currency as well. From a closing rate of 1.1506 on Wednesday, and a higher rate of 1.1526 the day after, Friday ended with the pound stalled on 1.1410.

Other currencies also took advantage of the situation, as the British pound lost its footing on the markets throughout the world. It was worth 8.7739 against the Chinese yuan on Wednesday, and worth more at 8.7985 the day after. But again, we saw a harsh drop as the news of a hung parliament became clear. This led to a poor performance and a fall to 8.6677 against the Chinese currency on Friday.

Since Theresa May was the sitting Prime Minister, and she did win the biggest number of seats (just falling short of a majority), she has formed a government. She looks to be forming a coalition of sorts with the DUP (Democratic Unionist Party) in Northern Ireland. However, the details are as yet uncertain. 

As we move forward, there remains the possibility the Prime Minister could face a vote of no confidence and could have her leadership challenged. If this occurs, the prospect of another leader – and even another election – could both damage the standing of the already-weakened British pound.