As reports of Theresa May reaching a deal with the DUP to form a government emerge, Luke Walden, FX Specialist at Godi Financial, considers what this means for the FX markets.
Well, there we have it. The UK population has voted on one of the most highly anticipated general elections in recent times. Although the Conservatives have ‘won’ the election with 318 seats (forecast to end up with 319 seats), they failed to reach the all-important 326 seats to win a majority and as such the chance to push through their ‘hard-Brexit’ negotiations. Labour staged a remarkable recovery in a short space of time to finish on 261 seats. This is a far cry from the ‘unelectable’ Jeremy Corbyn of two months ago.
It must not be forgotten that Theresa May didn’t have to call this election and could have carried on as PM until 2020. When she called the snap election, the Tories were seen as 20pts ahead of Labour. To say this Conservative campaign has been a disaster is an understatement. Yes, Labour have put together an encouraging manifesto and hard hitting campaign, but May and her colleagues must have their heads in their hands this morning. As I type, we’re waiting for Theresa May to make an official statement but she will be visiting Buckingham Palace to seek permission to form a UK government.
Sterling has unsurprisingly weakened overnight on the election outcome. A hung parliament outcome was seen as the worst case scenario for the Pound and I think many will be surprised that it isn’t in fact a lot lower this morning. As I type, GBP/EUR headline rate is 1.1385 and GBP/USD headline rate is 1.2720.
At Godi, we have been highlighting the importance of companies hedging their foreign exchange (FX) exposure to limit their risk and liabilities to the markets. This result only further supports that strategy as markets will continue to see further volatility as a new parliament is formed, and then of course once the official Brexit negotiations begin. Scarily, it’s looking likely that a new parliament won’t be formed in time for the initial talks.
So what now?
It seems May has refused to listen to her doubters this morning by resigning and is actively looking to form a coalition parliament with another political party. Rumours are abound that she will speak with the DUP (Democratic Unionist Party who have 10 seats) – it seems she doesn’t have many other admirers to talk to. This seems the most likely outcome allowing her to limp onwards towards Brexit which may explain why Sterling has not weakened as much as first feared. Any coalition will of course make it harder for her to push through her ideas for Brexit, but I would imagine not hinder her too much.
What is clear that markets will continue to fluctuate based on what will be disclosed over the coming weeks and months. Let’s just hope that whichever course is taken, a clear negotiation with Brussels is undertaken and everyone moves forward together.
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