MAY-HEM

The UK election results are in and the pound is plunging

This post was updated at 7:00am UK time.

Voting is over in the UK and the result is a big shock, not least to the markets.

With only a few seats yet to announce their counts, the UK is headed for a so-called “hung” parliament. The Conservative party, led by prime minister Theresa May, have lost their majority, though still remain the biggest party, with a projected 318 seats, down from 330, in the 650-member parliament. The opposition Labour party has picked up seats, to 262, up from 229, but forming a coalition with other left-leaning parties with enough seats to form a majority will be difficult.

The pound promptly plunged against the dollar by about 1.5% as exit polls were published at 10pm local time. It has been bumping around at that level—just above $1.27—as seat-by-seat results were announced throughout the night.

In calling the unexpected “snap” election, May’s Conservative party was expected to expand its narrow majority in parliament. Instead, a “hung” parliament, with all the uncertainty and instability that entails, is on the cards, just over a week before official Brexit negotiations are scheduled to begin. Voter turnout, at nearly 70%, is set to be the highest at a general election for 20 years.

The UK also ended up with a hung parliament in 2010, and the subsequent days of talks to form a coalition government (eventually settled by the Conservatives and Liberal Democrats getting together) sent the pound tumbling. Analysts at ING warn said that the pound could fall more sharply, down to $1.24, during another round of political horse trading. Others are even more bearish, like Dean Turner of UBS Wealth Management, who says that $1.20 is “a very real possibility.”

“In the immediate term, the pound could fall sharply until there is further clarity,” Mitsubishi UFJ Financial Group strategist Lee Hardman writes in a research note. “There is plenty of scope for speculators to rebuild short pound positions on the back of heightened fears that a more disorderly Brexit is on the cards.”

“Right now, the market is not in panic mode, but it is shell shocked by this result,” according to Kathleen Brooks from City Index.

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