Sterling stabilises after big drop with Conservatives set to rely on DUP to form minority government

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Theresa May's future as Prime Minister hangs in the balance (Source: Getty)

The pound has stabilised below $1.28 in early morning trading after a General Election which saw Conservative leader Theresa May humiliated, but likely at the time of writing to be able to form a minority government with support from the Democratic Unionist party (DUP).

Sterling plunged from above $1.295 against the US dollar just before the exit poll was revealed at 10pm last night, almost approaching $1.27 within five minutes. Against the euro the fall was equally dramatic, from just above €1.155 to just above €1.138 at the time of writing.

Despite volatility since the exit poll sterling has remained at roughly the same level, trading around $1.275.

Read more: A hung parliament. Sterling plunges. What would come next?

The Conservatives are likely to be able to rely on the support of the DUP to pass the Queen’s Speech, the Budget, and votes of no confidence – the prerequisites of a functioning government.

The largest Northern Irish DUP had a strong night, winning 10 seats and wiping out unionist opposition, and now finds itself kingmaker. The DUP is staunchly in favour of Brexit.

However, the Tories have ended up in a far weaker position than they started after a disastrous election campaign. Prime Minister Theresa May has already faced calls from within her party to consider her position.

Mark Haefele, global chief investment officer at UBS Wealth Management, said: “They have been severely weakened by the vote.”

The result may be an emboldened right wing of the Conservative party in favour of a“hard Brexit”. Prospects for the pound in recent months have relied on the ups and downs of the Brexit process, with a more complete break generally considered by investors to be worse for British assets.

Read more: General Election 2017: Most surprising wins and losses

A minority Conservative government hanging by a thread will be vulnerable to rebellion from individual MPs, which will make the Brexit process more sensitive to domestic politics.

Lee Hardman, currency analyst at MUFG, said: “Without question, there is volatility ahead. The market is desperate for any indication of what a Brexit deal might look like.”

He added: “If the market anticipates a hard Brexit, the pound could drop to 1.20 to 1.25 against the dollar.”

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