The projected crash in sterling on foot of Theresa May’s election reversal hasn’t, as yet, materialised
The currency was this morning trading 1.5 per cent down against the euro at 87.5p, having fallen to 88.6p as news of the likely result filtered out last night. By late afternoon, it was holding its own at 87.8p.
While a weaker sterling represents more bad news for Irish exporters, who have been stung by the slide in the pound since the Brexit referendum last year, it could have been much worse.
Analysts had predicted a hung parliament result in the UK would see sterling crash to a new low 92p, a level not seen since the flash crash incident of last October.
This view was predicated on the fact that markets would abhor a vacuum even more than a Labour victory.
However, according to Investec’s head of FX Mark O’Brien, investors have taken some comfort in the fact that there is going to be a government, most likely the Conservatives and the North’s DUP, with a working majority. “That’s why we haven’t had the predicted collapse in sterling,” he says.
O’Brien says the objective of strengthening her hand in the negotiations has failed, leaving her more exposed to the buffeting winds of the hard Brexiteers and the Remainers within her own party.
However, that could also stop her walking away from a deal in favour of a so called hard Brexit, he says, which the markets may be viewing as a positive.
Before the vote, some analysts, including JP Morgan, had predicted that a reversal for the Conservatives would force the UK to take softer approach to Brexit, and this may be feeding the same trend.
For now, the results of the UK elections do not appear to be threatening the global growth story," Mark Haefele, global chief investment officer at UBS, said in a note to clients. But for Britain, "political uncertainty is likely to more than offset any benefit from a marginally weaker pound," he said.
And already the weaker pound has made imports more expensive and depressed consumer spending.
Consumer data, published this week, showed that retail spending stalled last month as higher prices resulting from the weak pound deterred shoppers from buying non-essential items.
This trend is only likely to accelerate in the short term as a result of the election, which will be cold comfort for Irish businesses trading in the UK market.
