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British Pound Falls on U.K. Election Projected Results U.K. Election, Designed to Bolster Government, Instead Delivers Confusion
(about 2 hours later)
LONDON — The British pound fell sharply late on Thursday, hit hard by an exit poll showing that Britain’s incumbent Conservative Party had unexpectedly lost its majority in Thursday’s election. LONDON — In a global economy amply stocked with anxiety-provoking variables, Britain just added another.
The exit poll showed that the Conservatives, led by Prime Minister Theresa May, would remain the largest party in Parliament but had failed to retain an overall majority. If the results bear out, they would result in a so-called hung Parliament, leaving the Conservatives to search out a smaller political party to form a coalition government. That outcome would also complicate the prospects for the country’s negotiations to depart the European Union. An election designed to bolster the government’s mandate instead yielded fundamental confusion over who is in charge as the nation prepares for fraught negotiations in its pending divorce from the European Union.
Analysts warned in the run-up to the election that the pound would be particularly hit by such uncertainty, but polling during the campaign had suggested that Conservatives would retain a majority in Parliament. Prime Minister Theresa May had called the election on the assumption that her Conservative Party would emerge stronger, solidifying her negotiating position. Instead, the electorate’s stunning rebuke of her leadership all but guarantees a period of unpredictable political jockeying, intensifying uncertainty about future commercial dealings across the English Channel.
The publication of the exit poll at 10 p.m. local time, however, sent the British currency sharply lower, and it fell as much as 1.7 percent to $1.2739. The Japanese yen, despite its reputation as a safe haven, weakened slightly during the Asian day. Markets in Japan, China and South Korea all ended the day slightly up. Investors took the latest turmoil in Britain as a prompt to unload the British pound. As European markets began trading on Friday, the currency slipped about 2 percent against the dollar.
“The exit poll has certainly produced a shock wave in markets, with disbelief and then a swift drop in the pound,” said Chris Beauchamp, chief market analyst at IG Markets. “Once again, it seems as if the British public has decided to surprise everyone.” And yet the shocking electoral outcome also has the potential to diminish the looming economic costs of Britain’s exit from the European Union, commonly known as Brexit.
The outcome — if the exit poll results are confirmed — follows a referendum a year ago in which Britain voted to withdraw from the European Union. The so-called Brexit vote also sent the pound lower, because investors worried that the decision would have a negative impact on Britain’s economy. It enhanced the possibility that a chastened government led by Mrs. May, or perhaps an administration led by someone else, would now strike a less confrontational approach with Europe while seeking a way to keep Britain within the bloc’s large single marketplace.
As Britain prepared for its face-off with Europe, the prime minister had been adamant that her country would impose strict limits on immigration, a posture seemingly enhanced by recent terrorist attacks. Yet limiting immigration appeared certain to cost Britain inclusion in the European single market, a swath of the globe stretching from Ireland to Greece and holding some 500 million relatively affluent consumers.
The European authorities have consistently emphasized that Britain’s continued inclusion in the single market requires that it abide by the bloc’s rules — not least, a provision that people be allowed to move freely within its confines.
In the parlance of the moment, Britain appeared destined for a so-called hard Brexit, in which it would sever itself from the single marketplace, raising the prospect that tariffs could ultimately constrain trade across the English Channel.
This redrawing of the basic geography of European commerce was playing out just as President Trump was disavowing regional trade deals across the Atlantic and Pacific, while variously threatening trade hostilities with Canada, China, Germany and Mexico.
This election could change that trajectory.
Whoever will be in charge — a government led by a weakened Mrs. May, another member of her Conservative Party, or a coalition spearheaded by the Labour Party — might well construe a mandate to pursue a softer Brexit. The unexpected new political configuration might compel Britain to relinquish its pursuit of immigration limits in an effort to keep itself within the single market.
In short, the election has complicated the assumption that Britain is headed irretrievably toward the exits, producing a moment in which seemingly everything may be up for reconsideration.
Those who have favored Britain remaining within Europe, or at least softening the terms of its exit, now have “an expectation, or at least a hope, that cooler heads will prevail,” said Jeremy Cook, chief economist at World First, a company based in London that manages foreign exchange transactions. “It may be that hard Brexit has been rejected by the electorate.”
And yet, perhaps counterintuitively, the election also appeared to increase the possibility of an unruly Brexit in which Britain crashes out of the European Union absent a deal governing future interaction.
Mrs. May formally initiated the proceedings in March, setting the clock ticking on a two-year negotiating window in which Britain and Europe must settle financial terms and strike an agreement on trade. That was always going to be complicated, subject to the influence of domestic politics in the other 27 members of the European Union.
Now, such talks are to unfold in an atmosphere in which the control of Britain’s government is up for grabs, with the prospect of still another election later this year. All of which heightens the possibility that the two-year clock may expire without a deal, a scenario known in Brexit vernacular as going over the cliff edge. As the metaphor implies, it could get ugly.
Britain now sends nearly half its exports to the European Union, a flow of goods that would be impeded by its departure from the single market.
London’s future as a dominant global financial center would be imperiled. Global banks have established regional headquarters in the city, relying on so-called passports that allow them to serve clients across Europe as if the bloc were one country, with a single set of regulators. If Britain abandons Europe without a deal, the banks would have to satisfy regulators in multiple countries. Many of the transactions they now handle in London for European clients would be effectively illegal.
Worries about the economic impact of Brexit have been weighing heavily on the pound, which plunged after the referendum last June that unleashed Brexit. With Britain at risk of suffering barriers to trade, it has lost some of its considerable luster as a place for companies to invest, making its money a less desirable currency to hold.
A weakened pound has, in turn, translated into rising prices in Britain — on food, gasoline and imported components used by domestic factories. All of this has reinforced concerns about the fate of the economy.
The scene in Britain has played out just as other sources of uncertainty have been gnawing at the global economy.
Beyond his bellicose threats of confrontation on trade, President Trump revoked American participation in the multinational accord struck in Paris to combat climate change, heightening a sense that a global order long shaped by American engagement is now fundamentally uncertain.
Perpetual existential threats to the euro, the currency shared by 19 European countries, were eased last month by the election in France, which saw the defeat of Marine Le Pen, who had threatened to pull her nation out of the common currency area. But elections to be held in Italy this year or early next year may elevate the Five Star Movement, which has been gaining strength in part because of talk of scrapping the euro.
Add to the list of variables the fact that Britain — with the world’s fifth-largest economy — is scheduled to sit down with European leaders to haggle over Brexit lacking, for now at least, a clear sense of who has the authority to promise what.
The decisive question is whether this latest wave of uncertainty marks a step back from Brexit, one that could restore a sense of calm, or whether it means more chaos at a time when the world craves capable leadership.
“The outlook for Brexit is now very unclear,” Mujtaba Rahman, managing director for Europe at Eurasia Group, a risk consultancy, said as the sun rose over London. “The odds of a softer Brexit have increased as a result of the outcome last night. At the same time, it also does increase the odds of a cliff-edge Brexit.”