The City is now scrambling to understand the implications of the General Election after the UK rejected Theresa May’s call for a bigger mandate to pursue Brexit negotiations.
The hung Parliament means the Conservatives will likely stumble on as a minority government with the support of Northern Ireland’s Democratic Unionist party (DUP), but the weakness of the mandate raises massive questions for the next government.
Sterling plunged immediately after the exit poll last night revealed the probability of no overall majority. Although it stabilised during Asian trading, there was further weakness as traders in the UK returned to their desks.
The big leg up for sterling when May announced the snap election on 18 April was based, according to most traders, on the prospect of an increased majority strengthening the Prime Minister’s hand in negotiations with the EU – most importantly against the right wing of her party.
The pound has already lost around half of its gains since that announcement, with analysts trying to work out how the result will change the Brexit process.
The answer may be: not that much.
“I’m not buying into the story that this points to a softer Brexit,” said Dean Turner, an economist at UBS Wealth Management. “It’s very hard to see how they’re going to change their stance.”
Read more: Election results: Bye bye hard Brexit?
On the other hand, the weakness of the Conservatives could force them to seek a softer Brexit consensus, according to Jonathan Riley, national head of tax at accountants Grant Thornton.
“She’s going to have to rely on Labour through the lobbies to make any progress,” he said. “She can’t just rely on her own party to get things through.”
Northern Ireland at the centre of politics
After an election in which Labour leader Jeremy Corbyn was monstered for his past comments on the Irish Republican Army (IRA), there is a small irony that once more Northern Ireland will take a central role in the political life of these islands.
The DUP has found itself kingmaker. Its 10 seats (a gain of two out of 18 in NI) will allow the Conservatives to pass a Queen’s Speech and a Budget, as well as batting away no confidence votes.
The DUP is a strong supporter of Brexit, despite the huge implications for the NI border with the Republic of Ireland – and even for the Peace Process. The latter point will be a vital aspect of the Tories’ task, said Derek Halpenny, European head of global markets research at MUFG.
“The government will have to be hugely conscious of not creating instability in Northern Ireland,” he said.
Meanwhile there is still the small matter of a divisive stalemate in Stormont, Northern Ireland’s local assembly. A deal to get the Northern Irish executive functioning will likely take a higher priority now.
Lame duck government
In some ways this result could mean the status quo for businesses in the medium term remains unchanged.
The Conservatives will struggle to make any major policy changes on the domestic front, although they will be able to rely on their March Budget for a while longer.
The more divisive elements of their agenda will struggle, but for policies that unite their party they will find little issue. Corporation tax, for instance, will still fall to 17 per cent in 2019, unless the DUP rebel (unlikely, given their own plans to slash corporation tax).
“The general political shift to the left within both mainstream parties spells less austerity,” said Gervais Williams, senior executive director and fund manager at Miton.
New Prime Minister?
Of course, businesses will not welcome the prospect of further uncertainty.
Paul Hardy, Brexit director at law firm DLA Piper, said: “This additional political uncertainty is bad for businesses, who may find it even more difficult to make big decisions on jobs and investment, given this result's implications for Brexit negotiations, as well as on coherent policy making at home."
Grant Thornton’s Riley said: “The best thing that could possibly happen now is for nothing to happen.”
Whether that happens is an open question, with Conservative MPs already calling for Theresa May to “consider her position”.
Jostling to be May’s successor starts now, whether she hangs on in the coming weeks or not. Up for grabs will be the whole approach to Brexit and domestic policy – and yet more steps into the political unknown for the UK.