Monday 11 December 2017

Sterling plunges after shock exit poll to level that will hammer Irish exporters

Donal O'Donovan

Donal O'Donovan

The pound tumbled in a dramatic echo of last year’s Brexit vote after an exit poll showing the UK faces a hung parliament.

The news throws massive doubts on the logistics and potential tone of Brexit talks – including who will represent the UK in the crucial negotiations with EU negotiator Michel Barnier.

Sterling dropped 1.6pc in minutes to $1.2752 in New York after a 10pm exit poll showed Theresa May’s Conservative Party is unlikely to win an overall majority, though it will still be the UK’s biggest party. Against the euro the pound fell to almost 88p, a level that will hammer Irish exporters into the UK if it is sustained in the weeks ahead. 

“A hung parliament is the worst outcome from a markets perspective as it creates another layer of uncertainty ahead of the Brexit negotiations and chips away at what is already a short timeline to secure a deal for Britain,” said Craig Erlam, London-based senior market analyst at OANDA Corp.

Earlier, the pound rose to a near a two-week high as Britons went to the polls on Thursday, with the markets increasingly convinced Prime Minister Theresa May will retain and possibly increase a parliamentary majority following the UK general election.

Following a period of nervous volatility sterling steadied after final pre-election opinion polls suggested Theresa May’s Conservative’s remained well ahead with voters, despite earlier polls suggesting Jeremy Corbyn’s Labour Party had closed the gap.

As polls closed investors were betting on continued Conservative government, seen by many in the markets as better for the pound than the alternatives of a hung parliament or new Labour regime headed by Jeremy Corbyn, the veteran activist who has moved the party to the left on tax and spending priorities as well as defence, since the era of Tony Blair and Gordon Brown.

The pound shot up seven weeks ago, in the immediate wake of Theresa May’s decision to call a snap election. Polls then pointed to a landslide win for her, which analysts said would strengthen her hand to negotiate a Brexit deal with the EU without being pressured by the Eurosceptic wing of her own party.

"Markets appear to be pricing in a Conservative Party majority victory," said Jasslyn Yeo, market strategist for JPMorgan Asset Management. If the Conservative Party ends up gaining a decisive majority of more than 50 seats, that would probably be seen as a positive outcome for sterling, Yeo said.

The pound slipped as that initial lead in the polls shrank in the face of a high energy Labour fightback, before recovering this week.

Even so, low confidence in pollsters after last year’s unexpected Brexit vote and mixed signals this time around have left markets nervous. Global banks have beefed up staffing overnight to deal with any potential upsets. Measures of overnight volatility – based on bets already placed  in the market – suggest short term swings in the pound against the US dollar will be the most dramatic since the aftermath of the Brexit vote last June.

A clear win today for Theresa May will likely end short term volatility, and buoy wider financial markets. Any other results could trigger a more sustained period of volatility in the currency, share and bond markets.

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