LONDON – The pound fell sharply after Britain’s election saw the Conservatives lose their majority in parliament, raising questions about the next government’s ability to lead the talks to leave the European Union.
The British currency lost as much as 3 cents against the dollar by Friday as the results confirmed exit poll predictions that Prime Minister Theresa May had failed in her gambit to gain a stronger majority for those Brexit talks.
The pound fell as low as $1.2636 from $1.2955 on Thursday, before recovering slightly to trade at $1.2737.
Above all, investors are worried about the general uncertainty surrounding the country – whether a bruised May will resign in due course, whether the Conservatives will be able to form a new government or whether it will be an alliance of opposition parties, led by the Labour Party.
“The big picture is that political uncertainty could take weeks or months to be resolved and it is likely to weigh on both financial markets (in particular the pound) and the economy,” said Paul Hollingsworth, economist at Capital Economics in London.
As the dust settles, one issue will dominate investors’ concerns above all: whether Britain is more or less likely to retain privileged access to the EU’s single market, the destination for most of the country’s exports.
Currently, investors seem to worry that a weakened Conservative prime minister would not have the power to resist calls from some within the party who want a clean divorce from the EU, even if that means losing privileged access to the EU single market.
When May called the election in April, she did so with the Conservatives riding high in the polls, and the pound had surged on expectations that a big majority for the Conservatives would allow her to quell the so-called euroskeptics in her parliamentary ranks.
But her decision to call the general election has backfired, and it is not even certain she will remain at the helm.
Samuel Tombs, analyst at Pantheon Macroeconomics, says the pound could drop further, to $1.2600, where it was trading before May announced the election in April.
Complicating the outlook for the pound, however, is the strong showing by the Labour Party, which has advocated for closer ties between Britain and the EU single market. Though Labour is not expected to form the next government, even through an alliance with smaller parties, the vote suggests the British warmed to the party’s vision of keeping close ties with the lucrative EU market.
The drop in the pound could push up inflation further in Britain, eroding people’s living standards. It would make British exports more price competitive around the world – something that was reflected in a rise in shares for major British companies on Friday, with the FTSE 100 index was up 0.6 percent.
It would also in theory make it cheaper for foreign people and companies to spend and invest in Britain, though analysts say any gains would likely be offset by the chilling effect the general uncertainty will have on business investment.
“This is a serious moment for the U.K. economy,” said Carolyn Fairbairn, the head of Britain’s biggest business lobby, the CBI. “Politicians must act responsibly, putting the interests of the country first and showing the world that the U.K. remains a safe destination for business.”