Pound stabilises as May prepares minority government

The pound stabilised on Monday after suffering its biggest one-day drop in about eight months on Friday in the wake of the shock election result.

Sterling was little-changed against the dollar at $1.2739 and dipped 0.1% against the euro to 1.1367 euros.

On the stock market, the FTSE 100 index opened down 0.4% at 7,497.14.

Analysts said markets were now waiting to see how the government's approach to Brexit would change, if at all, following the election.

Last Thursday's election saw Prime Minister Theresa May lose her majority, throwing the country into political uncertainty.

Mrs May had been hoping to increase her majority ahead of the upcoming Brexit negotiations with the European Union.

She is now in talks with the Democratic Unionist Party to support her administration.

The uncertainty caused by the election result has also led business confidence to sink "through the floor", according to one lobby group.

A snap poll of 700 members of the Institute of Directors found a "dramatic drop" in confidence following the hung parliament.

'Up in the air'

Global currency markets are now watching how the election will affect the UK's exit from the European Union.

Negotiations with Brussels are due to begin next week, with the outcome expected to have a significant impact on the economies of both the UK and the EU.

Mrs May has been pushing for a so-called hard Brexit - where the UK leaves the EU single market and the customs union - instead of a softer Brexit, where the UK would maintain those links.

"Certainly, prolonged uncertainty would argue for a deeper correction on sterling as May's diminished Brexit mandate scenario plays out," said Stephen Innes, senior trader at Oanda.

"However, there are cooler heads in play suspecting the only real option left is the more market-friendly outcome where the UK adopts a European Economic Area-styled agreement. So, expect markets to struggle in the vortex of near-term possibilities clashing with longer-term probabilities."

Kathleen Brooks, research director at City Index, said the future direction of the pound was "still very much up in the air".

"The prospect of a hard split with the EU has been kryptonite for the pound, so a potential rethink on the UK government's Brexit stance could limit [the pound's] downside, at least for now.

"However, not even the rising odds of a soft Brexit have been enough to spark positive momentum for the pound."

(BBC)