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Pound falls after UK exit poll shows hung parliament

OK, it’s going to be a long night.

The exit polls are in. They suggest the Conservatives are on track to win 314 seats, with 266 to Labour and 14 to the Liberal Democrats. That means the Tories are shy of a majority, and we are heading for a hung parliament. (Full story on that here.)

Sterling has taken a heavy blow, falling 1.4 per cent on the day to $1.2719 at just past 5pm in New York, which would be its biggest one-day drop since early October.

Lee Hardman, a currencies analyst at MUFG said:

The market will be praying that this exit poll has got it wrong. Currency volatility is the best proxy for market fears; if the Conservative ship is sinking then the market will be looking for a life boat.

There is plenty of scope for a sharp downside move if the exit poll proves true.

James Knightley at ING writes:

While the exit poll suggests Theresa May’s Conservative Party is the largest party, she doesn’t have enough seats for a majority. It means Jeremy Corbyn could well be Prime minister in days, creating massive uncertainty for markets and the outlook for Brexit negotiations. Nonetheless, this is only an exit poll and a lot could change.

Kit Juckes, a senior FX strategist at Societe Generale, said in an email:

It’s going to be close. There will be other polls, and results will come out through the night, but this is going to leave T May struggling to keep control of the Brexit process. Can’t see how that’s helpful for the pound even if we are somewhat braced for a close outcome…

And Sam Tombs at Pantheon Macroeonomics notes:

This exit poll is a thunderbolt that leaves only two outcomes realistically in play; a slender Tory majority or a hung parliament.

Sterling already has fallen to $1.27, from $1.29 before polls closed. Even if the Conservatives squeak home with a small majority, we see no reason why sterling should trade above its pre-election announcement level of $1.26.

If, instead, the election results in a hung parliament, sterling likely will fall further as the parties negotiate a deal. Although markets likely would hate the extra uncertainty in the short-term, Labour’s soft Brexit stance could eventually be a positive for the pound.

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(Chart: Bloomberg)