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Pound steadies as election tumult subsides, but uncertainty remains

The pound looks a bit more stable as a new trading week gets underway and the volatility of Friday’s general election is replaced by enduring political uncertainty.

Sterling was up 0.2 per cent early in the European session at $1.2767 after remaining basically static for much of Asia trading on Monday.

The relative calm comes Friday’s 1.6 per cent drop as the prospect of a hung parliament sent investors into a spin.

Craig Erlam, senior market analyst at Oanda, suggested the FTSE 100 would pare back Friday’s gains in the face of gains by the pound, but cautioned that the currency was vulnerable to further downside:

With Theresa May scrambling to repair the self-inflicted damage suffered as a result of the election, there remains a huge amount of uncertainty around her position and with only a week to go before Brexit talks with the EU begin, I feel there may be a few more twists to come yet. May has not delivered the strong and stable government she wanted and instead looks weak and vulnerable. I find it hard to see how she recovers from this.

Samuel Tombs, chief UK economist for Pantheon Macroeconomics, was heartened by the election outcome, suggesting it had diminished the odds of a hrad Brexit.

Most importantly of all, the election has reduced the risk of a hard Brexit in 2019. The election result shows the Conservatives that they cannot win a majority on a hard Brexit platform. Even if the Prime Minister stays on to negotiate Brexit, the pressure within her party to change her stance will be strong.

Kit Juckes, global fixed income strategist at Societe Generale, was far less sanguine about the prospects for a softer Brexit and all that would entail for sterling, however:

I still don’t see how a deal which fails to deliver largely unfettered access to the Single Market can be called soft, and I still struggle to see how that can be agreed without a huge capitulation on border control. There really isn’t much wiggle room in the ‘four freedoms’. However, yet another sterling short-covering squeeze isn’t out of the question. And yes, it would be just another chance to buy EUR/GBP.