A british parliament without a clear majority, ”hung parliament”, adding an additional risk premium for the pound, which is expected to be traded weaker.
It writes Danske Bank, in an analysis for the uk elections.
The result of the election means that the conservatives, the Tories lose their current majority. When 644 of 650 places are allocated have the Tories scored 314 seats in the house of commons, while Labour has increased to 260 locations, according to BBC forecast.
The pound traded about 2 per cent weaker against both the euro and the dollar during Friday morning.
Danske Bank notes that the Tories are now likely to try to form a minority government with the support of the Democratic Unionist Party, the DUP, who looks to get top ten sites.
The majority, that they may gather together makes it difficult for the government to reign and will probably end up under pressure from the forces for and against brexit.
”It is difficult to say what this means for brexit. The new government must at least take a huge time to think over how to proceed with brexitförhandlingarna and whether or not they should adopt a softer attitude,” writes Danske Bank.
So far, the results appear to be in the vicinity of the worst for the pound. If someone is the winner so it should be the EU.
The prospect of a ”hung parliament” gave an initial sharp pundförsvagning up of 0:88 for the EUR/GBP directly after Thursday’s vallokalsundersökning.
”What will affect the pound in the near future is the strength of the new government, which is to go to Brussels to negotiate brexitvillkoren for the Uk, and since every possible coalition appears to be weak, so too will the pound to be weak”, according to Danske Bank.
Investors covered short positions in the pound ahead of the elections so there is space to sell off in the short term.
It determines for the pound in the longer term is brexitvillkoren, and the outlook for these has not been improved after the election results when the bargaining power has significantly shifted from the Uk to the EU.
”But if the new government adopt a softer brexithållning so it can be pundpositivt in the longer term, but this is obviously very speculative right now,” writes Danske Bank.
JP Morgan writes in a comment that the pound has lost more than the bank expected after this election result. The immediate outlook is cloudy. Even if the decline in support for the scottish nationalists in the SNP reduces the risk of a new referendum, and the long-term valuation suggests that the pound is cheap, so will the political uncertainty will dominate the next couple of days.
”In addition, the instability of the next government to weigh on the economy that already has shown signs of slow down, which in turn can have duvaktiga implications for the Bank of England. These countervailing factors, we adopt a cautious attitude against the pound, until more clarity emerges,” writes JP Morgan.
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