Sterling broadly weaker as political uncertainty dominates

Sterling fell broadly on Monday as investors worried about the impact of a period of political uncertainty on an economy already slowing sharply ahead of the launch of Brexit talks next week.

The UK pound slid to its lowest for nearly two months on Friday after shock election results left prime minister Theresa May short of a parliamentary majority and facing calls to step down.

Having traded as high as $1.2769 early in the European session, the pound fell steadily throughout morning trading, sinking almost half a per cent to $1.2686, just half a cent above Friday’s lows of $1.2636. It also weakened 0.6 per cent to 88.37 pence per euro.

“I’d imagine investors being a little hesitant to buy sterling in the very short term,” said Nordea currency strategist Niels Christensen. “We have this political uncertainty around how strong will the new government be, how difficult will it be to get through with its politics domestically, and the Brexit negotiations beginning in a week or two.”

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Mrs May reappointed most of her ministers on Sunday, but brought a Brexit campaigner and party rival into government to try to unite her Conservatives. She is in talks with the Democratic Unionist Party in the North to allow her to stay in power.

Aside from political uncertainty, a number of surveys over the weekend added to questions over the fate of the UK economy as it faces Brexit.

Almost half of British employers are unprepared for the government’s planned changes to immigration rules after Brexit, a survey from the Resolution Foundation think tank showed.

Another survey showed British business confidence has fallen sharply since last Thursday’s election, while figures showed British consumers cut their spending for the first time in nearly four years last month as households turned more cautious even before last week’s shock election result.

Bias for weaker sterling

Six-month sterling/dollar risk-reversals, a measure of the balance in the market between bets on a currency rising or falling, stood at -1.3 according to ICAP data. A negative number indicates a bias for weaker sterling. The futures market also showed a negative bias on the UK pound, with US positioning data showing investors increasing their “short” positions on sterling in the week up to last Tuesday, before Britain went to the polling stations.

“The near-term outlook for GBP is murky given that there are several factors likely to pull the currency in offsetting directions,” JP Morgan analysts said in a note on Friday. “However, political uncertainty will likely dominate in the coming days, and the resulting government is fragile.”

Despite the bearish sentiment in markets, some held out the prospect of a “softer” Brexit deal after the election as being supportive for the pound.

“It is hard to see sterling performing well over the summer given the possibility that the current state of political uncertainty could last for some time,” Bank of New York Mellon chief market strategist Simon Derrick said in a note.

"[But] it seems fair to say that the consensus view ... was that the practical outcome from the election would be the adoption of a softer negotiating stance... over Brexit. There is a view that this would prove mildly supportive for sterling." – Reuters