Sterling weakens in aftermath of UK election

As we take stock of what has happened after the UK general election and the start of Brexit negotiations, Luke Walden, FX Specialist at Godi Financial, considers what this means for the FX markets.

The UK population took to the polling booths on the 8th June and for the second time within a year provided a surprise result – this time for Theresa May and her Conservative government. It’s true to say that sentiment was moving towards Jeremy Corbyn leading up to the vote but the final result was still a shock of some degree. Although the Conservatives ‘won’ the election with 318 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 262 seats. This is a far cry from the ‘unelectable’ Jeremy Corbyn of two or three months ago.

 

Source: The Guardian 9 June 2017

 

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 much as 20pts ahead of Labour. To say the Conservative campaign was a disaster is an understatement. Yes, Labour put together an encouraging manifesto and hard hitting campaign, but May and her colleagues must have had their heads in their hands on the morning of the 9th June. What then transpired was even more bizarre. Theresa May immediately looked to form an agreement with Northern Ireland’s controversial DUP Party who have some extreme views in many areas. Nonetheless, David Davis has sat down at the negotiation table with EU leaders in Brussels while the Conservative/DUP agreement is cemented.

 

Sterling 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 were surprised that it didn’t initially move lower. GBP/EUR headline rate dropped to 1.1340 and GBP/USD headline rate to 1.2635. We have seen Sterling trade within a relatively tight range since but even so the intraday movements seem to be short and sharp and an indication that the next few months and years are going to be particularly volatile as Brexit negotiations continue.

 

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 recent result only further supports that strategy as markets will continue to see further volatility as the official Brexit negotiations continue and more details are extracted.

 

So where next?

Theresa May was defiant after the election catastrophe and refused to give up her leadership. She is still in the process of forming an accord with the DUP (Democratic Unionist Party who have 10 seats) which is expected sooner rather than later – it seems she was desperately short of other admirers to talk to. This outcome will allow her to limp onwards towards a more ‘softer Brexit’, albeit with a few more hurdles to jump than previously expected. This may explain why Sterling has not weakened as much as expected, and may favour it going forward. 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 is that markets will continue to fluctuate based on what will be disclosed over the coming weeks and months  meaning implementing a robust FX strategy  should be a priority for businesses who trade internationally.

 

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