LONDON – The pound is stable against the dollar and the euro at Friday lunchtime after Theresa May confirmed that she will form a new government in alliance with the Northern Irish Democratic Unionist Party.
Sterling dropped sharply on Thursday evening after the exit poll initially showed that no party would win a majority in the House of Commons and resumed its sharp slide in early trade in London on Friday morning after it became clear that the election had returned a hung parliament.
However, after news broke that May would visit the Queen and seek to form a new government, sterling stabilised, and remained stable after she officially confirmed that she will lead that government.
May confirmed that she will seek the support of her “friends and allies” in the DUP in order to deliver a period of “certainty” for Britain as it heads towards Brexit talks.
Those words helped stabilise the pound, which has pared back some of its earlier losses against the dollar and euro. Here’s how sterling looks against the dollar at 1.00 p.m. BST (8.00 a.m. ET):
And here's how the pound looks against the euro at the same time:
The rationale behind the move in sterling is that markets dislike political uncertainty, so the prospect of a period without a government, particularly as the UK heads towards the beginning of formal Brexit negotiations, is not a nice one.
Neil Wilson, a senior market analyst at ETX Capital, adds the Theresa May's reported decision to stay on as Tory leader despite the backwards step is also hitting sentiment.
Wilson says in an emailed statement: "Sterling took another leg lower as looks like Theresa May will grimly cling on as PM despite a disastrous night for her.
"May stepping aside creates uncertainty, but trying to stay as leader looks like it may even more unpredictable and uncertain for markets. Political gridlock is the key here and this doesn't look good for sterling."
While sterling's initial drop was substantial, it pales in comparison to its fall after Britain voted to leave the European Union last June. Here's the chart, showing the respective drops:
