Sterling actually fairly strong and stable

9th June 2017 By: Ranko Berich

Compared to the Conservative Party’s Parliamentary majority, sterling was relatively strong and stable overnight. Positions on the pound appear to have been readjusted rather than routed. While there was a 2% fall when the exit poll was released, to put this in perspective, sterling fell by a similar amount last year after Boris Johnson announced his support for team Leave. Liquidity was solid overnight, and the bid-ask spread was stable, especially when compared to the night of the EU referendum.

We would caution against assuming that the result means sterling is dead in the water. Further falls for in the immediate future do seem possible as uncertainty mounts. However, there are entirely plausible outcomes from the upcoming political wrangling where yesterday’s vote results in a government that looks for early wins, and therefore compromise, in Brexit negotiations. Equally, the fact that we have not seen sterling fall significantly below its initial lows suggests we have not seen any real fear or panic set in …yet.

The key things to look out for going ahead will be the speed and ease with which the next government forms, and if they take an obvious early stance that might lead us to conclude a “soft Brexit” has become more likely. However, sterling bulls may find any rally short lived, as the latest data suggest the new government will have to deal with rising inflation and a slowing economy, hardly conditions for durable currency strength.

May has now cobbled together a minority government with support from the DUP. This is of supreme irony considering the razor thin margins involved and her own taunts about a progressive “coalition of chaos”. Sterling has barely reacted to the news, pouring more cold water on any lingering ideas that a Conservative led Government is an unconditional good for the pound. The conservatives are hardly known for being forgiving to failed leaders. Consequently, the prospect of a coup will weigh heavily on both the government and financial markets, all while the United Kingdom embarks the most important negotiations in generations.