Showing resistance against the negative news for businesses after the vote that delivered a nightmare called “hung parliament”, the Sterling nudged higher during Tuesday’s trading session.
This was the result of investors made an effort to accept the reality of last week’s shock UK elections, said FXTM research analyst Lukman Otunuga.
Regardless of the current upside gains, the British Pound remains vulnerable to heavy losses with the outlook tilted to the downside as political instability in the UK weighs heavily on the currency.
This period of uncertainty is likely to leave investors on edge as questions are raised over the impact the general election results will have on Brexit negotiations.
Although a hung parliament has heavily restricted May’s ability to deliver the hard Brexit that some had feared, and has even sparked optimism for a softer exit from the European Union, Sterling continues to be overshadowed by the current instability in Westminster, said Otunuga.
DUP lifeline
With the conservatives eight seats short of forming a government, Theresa May has turned to the Democratic Unionist Party (DUP) for support in a bid to staying in power.
“Although Sterling could find itself buoyed in the short term if May secures a deal with the DUP on Tuesday when parliament sits for the first time since the election, I feel it may have little impact on the longer term bearish bias.”
Even if Conservatives are able to achieve the eight seats needed to pass laws in parliament, this is still a far cry from the strong and stable government which was promised in the election campaign.
Delays in Brexit talks
Otunuga said the UK remains in a vulnerable position with regards to Brexit talks.
With negotiation dates now up in the air and the UK government desperately attempting to stabilize, it will be interesting to see how the European Union reacts.
Recent reports of the EU’s Chief Negotiator, Michel Barnier, and UK’s Secretary of State for Exiting the European Union, David Davis, failing to reach an agreement on an official date for opening Brexit talks has fanned fears of complications in the early stages of the negotiations.
With political instability in Westminster potentially complicating and adding more pressure to Brexit talks, which already has a tight deadline, the UK remains in a vulnerable position.
With negotiation dates now up in the air and the UK government desperately attempting to stabilize, it will be interesting to see how the European Union reacts.
UK inflation hits 4 year high
Otunuga said with inflation propelled by Brexit-inspired currency depreciation, which he sees as uneasy levels, consumer prices were hitting a four-year high at 2.9% in May.
The Brexit-inspired currency depreciation has propelled inflation in the UK to With wage growth failing to keep up with inflation, consumers are likely to feel the pinch which may fan concerns over the sustainability of the UK’s consumer-driven economic growth, he said.
Are Sterling bears back in town?
The bearish price action on Sterling since the election outcome last week suggests that those who were passionately bullish on the currency could be having second thoughts.
With Theresa May’s gamble to strengthen her hand ahead of the Brexit negotiations back firing and sparking chaos in Westminster, the British Pound remains vulnerable to further downside.
From a technical standpoint, the GBPUSD is heavily bearish on the daily charts. Previous support around 1.2775 could transform into a dynamic resistance that encourages a decline towards 1.2600.