A hung parliament offers sterling little comfort

May 7, 2010

Mark Bolsom is head of the UK Trading Desk at Travelex, the world’s largest non-bank FX payments specialist. The opinions expressed are his own.-

The final results are almost fully in and despite months of intense speculation the hung parliament outcome has come as an almighty shock to the financial markets.

As the likelihood of a decisive majority began to ebb away early this morning, sterling fell to a 12 month low against the dollar ($1.4476). And despite the euro’s weakness, sterling plummeted 3 percent in the middle of the night against the single currency, an unprecedented drop at that point during the day.

A hung parliament verdict was always going to be the markets worst nightmare and it really is a spectacularly disappointing result. Rightly or wrongly, the financial markets believe a hung parliament will hamstring the government when they come together to create a workable plan for reducing the deficit.

It is difficult to assess whether this is a legitimate concern – certainly there is wide acceptance across the political spectrum that tackling the deficit is the main priority – so it would seem strange for the parties to delay any decision making.

However, whilst it is very unlikely a similar situation will occur in Britain, the crisis in Greece does show what can happen if the markets do not accept the debt-reduction plan.

If we are to avoid a similar reduction in credibility and a resulting downgrade in our credit rating, it is crucial the government cooperates in the early stages of next week.

On the whole however, pre-poll fears about a run on the pound were exaggerated. The pound has suffered, but we have seen much worse. Surely the real test will come in the next few days and weeks.

If the main parties cannot cooperate to form a credible deficit reduction plan, the pound’s value will plummet and potentially we could see it fall to 1.15 against the euro and under $1.50 against the dollar.

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