British currency plummets in wake of election, while other currencies remain stable

Despite economic unrest in Britain, the global market generally remains unaffected by Thursday's British election upset. This unexpected political development could create complications with Brexit negotiations.

Hannah McKay/Reuters
The Bank of England in London, April 19, 2017. In response to the recent election upset Thursday, the British pound value dropped significantly.

Britain's pound plunged to its weakest level in seven weeks on Friday after Prime Minister Theresa May's Conservative Party lost its parliamentary majority in national elections, potentially disrupting Brexit negotiations.

Just 10 days before the start of negotiations on Britain's divorce from the European Union, no single party won a clear claim to power in Thursday's snap vote.

The result – flagged by some analysts as the worst possible election outcome due to uncertainty – saw the pound fall as much as 2.5 percent to $1.2636 in early European trade. That was its lowest level since May called the election on April 18.

It had recovered a notch by midday in London to trade 1.6 percent lower at $1.2745.

Despite facing calls to quit after her election gamble to win a stronger mandate backfired, May will proceed on Friday to ask Queen Elizabeth for permission to form a government.

"We still think that sterling will find support despite the near-term weakness," said Martin Arnold, FX strategist at Exchange-Traded Fund Securities in London.

"Although [the election result] raises ... the potential for policy paralysis like we're seeing in the States, it's probably not at this stage too damaging to Brexit negotiations – those will likely continue along the same lines as expected."

Reactions in other major currencies such as the dollar, euro and yen were limited. They had already largely shrugged off Thursday's testimony by former FBI director James Comey, which had been seen as the week's other big event.

"[The election result] is more of a UK-specific negative development than a broader, global, macro one," said Mitsubishi UFJ Financial Group currency strategist Lee Hardman in London.

"The harder Brexit scenario could have some negative implications for Europe as well as some impact globally but at the end of the day it's still more of a regional story."

The dollar was up 0.4 percent at 110.385 yen and against a basket of major currencies was up half a percent at 97.392.

The dollar index had fallen to a seven-month low of 96.511 midweek when caution ahead of Mr. Comey's testimony and the British election drove United States yields to their lowest levels since November. But yields have since bounced from the lows as risk aversion ebbed.

The US Federal Reserve is widely expected to hike interest rates after it ends a two-day meeting on Wednesday, and investors' focus is on whether it would leave the door open for further monetary tightening in the months to come.

The euro extended overnight losses and was 0.3 percent lower at $1.1179, off a seven-month high of $1.1285 touched a week ago on improved growth prospects in Europe and a broadly weaker dollar.

But the common currency was capped after the European Central Bank on Thursday cut its forecasts for inflation and said policymakers had not discussed scaling back its massive bond-buying program.

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