.The value of sterling was significantly affected by the British election result. The unexpected British election result resulted in the UK pound dropping by up to 2.5% Friday. The election resulted in a hung parliament. This means the ruling Conservative party may have to rely on another party top stay in power. In this case, it would be the Democratic Unionist Party (DUP) of Northern Ireland.
Brexit negotiations just got more difficult. Theresa May made an error of judgment in deciding to fight an election at this time. Her refusal to take part in a televised debate with leaders of the other parties has backfired on her. It showed her to be a weak leader unwilling to take on her political opponents face to face.
The election result indicated that no party would be able to form a stable government. Since a rerun is not an option, whatever deals are made between the various parties will lead to a weak government. It would have no defined mandate to negotiate Brexit – or any other major policy. Having thrown away the working majority she had prior to calling the snap election, Theresa May now finds herself in a difficult position.
Sterling now lies at $1.2740, having reached a low of $1.2636. The slight increase may be connected to the fact that the ten seats of the Democratic Unionist Party of Northern Ireland will likely be backing the Conservatives in parliament. This gives the coalition a parliamentary majority.
It should be noted that this low level of sterling is no less than where the UK pound stood prior to Theresa May calling the election back on 18th April. So it is not a disaster in financial terms. While May’s objective of getting a mandate for a ‘hard Brexit’ has been rejected by the electorate, the possibility of a softer Brexit would support the UK currency.
The difference between a hard and soft Brexit is that the former will result in the UK leaving the single EU market and the customs union. Some businesses would suffer through this.
This election result has had a negative effect on foreign exchange and the strength of the UK pound. British travelers will be liable to get fewer dollars and euros for their pound. It would also affect the UK import-export balance. A weaker pound makes imported goods more expensive.
Now that Theresa May has indicated that she is to form a new government, likely backed by the DUP, this situation may stabilize to an extent. However, the value of sterling will remain volatile for some time yet. Matters will likely be stabilized once the Brexit deal has been agreed with the European Union. Until then, we can expect a degree of volatility in the value of the UK pound. And also in any other financial entities that rely on sterling for their value.
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