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Sterling dips as investors digest election’s Brexit fallout

The pound is sliding in late-morning European trading as markets chew over the fallout on the UK’s Brexit talks from the Conservative party’s failure to secure a parliamentary majority last week.

Having finished the day 1.6 per cent lower against the dollar on Friday, the pound has begun the new week on the back foot.

At publication time, sterling is off 0.37 per cent against the dollar to $1.2694, falling to as low as $1.2688. Friday’s one-day fall was the worst since last October. The pound is 0.54 per cent weaker against the euro.

Despite a hung parliament being seen by some as the worst-case scenario for the UK currency ahead of the vote, a minority Conservative government has now raised the prospect of the government pursuing a “softer” EU exit deal.

This could involve a longer transition period to take the country out of the bloc after 2019 and a retention of membership of the single market or customs union.

“The rise of softer Brexit speculation is another reason why the pound has not declined more sharply following the UK general election result”, notes Lee Hardman, currency analyst at MUFG.

But Mr Hardman is not quite convinced and still expects the government to stick to its original Brexit plan. David Davis, Britain’s Brexit minister, stressed this morning that nothing had changed despite the prime minister’s weakened mandate.

A minority government has also heightened the risk of another general election later this year and the prospect of Britain running down its two-year Brexit clock without a deal at the end of it, according to analysts.

Betting markets are placing a 33 per cent probability on another general election this year, according to Betfair.

“Theresa May’s premiership is hanging by a thread and she is unlikely to remain in Downing Street for more than a few months”, said Mujtaba Rahman, head of Europe at risk consultancy, Eurasia.

“The clock is ticking towards the March 2019 deadline and the turmoil in British politics could cause further delays”, added Mr Rahman, who puts the “no deal” risk at 30 per cent.