STERLING WAS battered by currency traders in the immediate aftermath of the British general election result, but the currency recovered over the course of the day.
Comments made by Liberal Democrat leader Nick Clegg yesterday afternoon appeared to lessen the risk of a political stalemate and prompted a recovery in sterling.
The pound hit a one-year low against the dollar, trading below $1.45, before rebounding to more than $1.47 as Conservative Party leader David Cameron said he would try to form a minority government with the support of Mr Clegg’s party.
Credit ratings agencies also assured that Britain’s AAA rating – the strongest possible credit status – was not under threat, confirming suspicions that investors had already priced in the likelihood of a hung parliament.
However, sterling weakened by the most in a year and a half against the euro, while UK government bonds were also under pressure. By the end of what was a volatile day in currency trading, the euro strengthened against the pound to just over 86 pence.
Market analysts noted that the clock was ticking on the formation of a viable coalition in the UK as investors wanted clarity about how the next British government would tackle its debt.
“For the market, it is the result it did not want,” said Ted Scott, UK strategy director at FC Investments.
The hung parliament result exacerbates the vulnerability of the UK to spreading fears about sovereign debt across Europe. The UK was already at risk of contagion from the Greek crisis because it carries a large deficit and analysts believe that sterling could weaken further if investors sense a paralysis in policy.
Shares across Europe ended the day at the lowest closing values in six months, with London’s FTSE losing 2.6 per cent on the day as both the Greek crisis and unclear election result weighed on investor sentiment.
