LONDON (Reuters Breakingviews) - British voters are their currency’s worst enemy. An election that produced no clear winner has knocked sterling lower, nearly a year after it was pummelled by a UK vote to leave the European Union. A brutal EU exit and a second Scottish independence referendum may now be a little less likely. But that is not a good enough reason to stock up on pounds anytime soon.
Sterling was the worst hit of all UK assets on Friday after Prime Minister Theresa May’s parliamentary majority was wiped out. It fell more than 2 percent to below $1.27 and lost nearly as much ground against the euro. The currency is more than 10 percent above the lows that it set against the dollar after the EU referendum in June 2016 but its near-term prospects are blighted by the political uncertainty that investors detest. In the currency options market, the preference to sell sterling for either dollars or euro in the future grew more marked.
Granted, pain now may spare the pound greater grief later on. A weak Conservative government is less apt to take the hard-line in Brexit negotiations that May had promised to adopt if she won a big majority. That reduces the risk of an economically-damaging withdrawal from the bloc – the worst case scenario for the pound. Also, losses for the Scottish National Party make another vote on secession less likely, removing another potential risk to the pound.
But the silver lining isn’t quite shiny enough to distract investors from the pound’s immediate problems. First, policy uncertainty could weigh on investment when growth is already slowing. Second, a renewed slide in sterling will make imported goods more expensive and bolster inflation, which is already outstripping wage growth to the detriment of consumers. Third, foreigners may become warier of buying gilts if a fragile government, hostage to vested interests, spends more to cling to power. Even if Brexit negotiations aren’t bumpy, sterling’s path will be.