Pound kept under pressure after UK elections

LONDON: Sterling traded lower against the US dollar yesterday, with investors reluctant to buy the currency after a British election yielded no clear majority for any party and threatened to undermine Brexit talks due to begin next week.

The pound slid to its lowest in nearly two months last Friday after Prime Minister Theresa May’s election gamble backfired, eroding her parliamentary majority, although her Conservative Party still won the most seats.

Having traded as strong as US$1.2769, the pound was 0.1% lower at US$1.2725, still nearly a full cent above Friday’s lows of US$1.2636. Against the euro, it dipped 0.3% to 88.15 pence.

“I’d imagine investors being a little hesitant to buy sterling in the very short term,” said Niels Christensen, currency strategist with Nordea.

“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.”

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 still negotiating for support from Northern Irish Unionists 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 Britain’s economy – the world’s fifth biggest – 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 yesterday.

Another survey showed British business confidence has fallen sharply since last Thursday’s inconclusive 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.

Six-month sterling/dollar risk-reversals, a measure of the balance in the market between options betting on a currency rising or falling, stood at -1.3 yesterday, according to ICAP data. A negative number indicates a bias for a weaker pound.

The futures market also showed a negative bias on the 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.

Despite the bearish sentiment in markets, some held out the prospect of a “softer” Brexit 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,” wrote Simon Derrick, chief market strategist at Bank of New York Mellon.

“(But) it seems fair to say that the consensus view on Friday within the markets was that the practical outcome from the UK general election would be the adoption of a softer negotiating stance by the UK government over Brexit.

“As a result, there is a view that this would prove mildly supportive for sterling.” — Reuters