Sterling Retreats as Election Fallout Continues

Contrite May Rallies Party

Sterling has fallen by close to 2.5% against the dollar since the shock election outcome which has led to a hung Parliament.

Having recovered a little from its initial fall, following the publication of the exit poll, the pound resumed its relatively shallow drop. It has reached a low of 1.2635 on successive days although it has now recovered a little to 1.2650. The Euro reached a high of 0.8868 before also registering a minor correction.

Uncertainty over the completion of a deal with the Ulster Unionists has led to a possible delay in the delivery of the Queen’s Speech to Parliament. The opposition has described the delay as a further indication of a Government in crisis.

The Prime Minister, Theresa May, met with an influential non-Ministerial group of MPs’ last evening to apologize for the poor election showing and was sufficiently contrite to earn their support. Her “I got us into this mess and I am the person to get us out” rallying call my have bought her sufficient time to create a platform to govern no matter how shaky.

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Brexit talks to be delayed

Much to the annoyance of Angela Merkel, who had predicted a punctual start to formal Brexit negotiations, it now looks like they will be delayed. It would be impossible for the minority Government to start talks without the clear mandate provided by the passing of the Queen’s Speech through Parliament.

Following the triggering of Article 50 of the Lisbon Treaty on March 28th, Brexit became irreversible and the clock is ticking.

Following its inability to secure a majority, the Government will have to “water down “several its manifesto pledges and one of the major casualties will be the “no deal is better than a bad deal” mantra. The definition of a “bad deal” will now be under scrutiny as continued membership of the single market becomes the major focus. Free movement and the treatment of EU Nationals already living in the U.K. are likely to become the “bargaining chips” Michel Barnier was hoping for.

The contrast between the U.K. and E.U. couldn’t be starker as the negotiation process gets under way. Elections held already in The Netherlands and France have bolstered support for the E.U. despite its economic constraints on individual countries.

Inflation data unlikely to provide relief

Today sees the release of inflation data for May in the U.K. The month on month figure is likely to have fallen a little on seasonal factors and a weak oil price. Year on year, an unchanged 2.7% is going to continue to put pressure on the MPC. BoE Governor Mark Carney was spared having to appear before a House of Commons Committee yesterday, so it is untrue to say that no one benefitted from the election result!

The MPC meets this Thursday and Carney, although proved right about the headwinds faced by the U.K., could never have imagined their direction.

The FOMC begins its two-day meeting in the U.S. today and a rate hike is still very much the likely outcome. The committee must decide if sufficient time has elapsed for the two previous hikes to have had the desired effect.

The decision is unlikely to be unanimous given concerns raised by the latest employment report which was weaker than expected. However, not for the first time, Janet Yellen appears to have “painted herself into a corner”.

Conservatives to fall tantalizingly short

A final word on the U.K. election.

The latest estimate puts the Conservatives at 316 seats, nine short of an overall majority. This means with the support of the Democratic Unionist Party, the Conservatives equivalent party in Northern Ireland, who are expected to win ten seats, Theresa May will be able to form a Government pass a Queen’s Speech debate and produce a budget. However, she will hold the slenderest of leads and a further election in 2017 cannot be ruled out.