STERLING sank to a one year low today as markets reacted badly to the possibility of a hung parliament.
The pound fell as low as $1.4596 as investors turned to safer currencies, namely the dollar, for stability.
Duncan Higgins from Caxton FX said: “The outlook for sterlng is negative from here. The dollar is the safe haven currency of choice at the moment and investors are still willing to go long against the dollar, which is negative for sterling.”
Traders said the general election result was the worst possible outcome for sterling and warned that the currency market faces a week of uncertainty as politicians horse trade for power in Westmintser. Analysts added that they expect sterling to fall further after the weekend, unless a clear winner emerges.
“As long as there is uncertainty about who will form the next government any gains for sterling will be capped,” said James Hughes, analyst at CMC Markets.
Ian Stannard, senior currency strategist at BNP Paribas added: “Sterling will continue to suffer until there is some certainty.”
With a majority of the votes counted, neither a combination of the ruling Labour party and the Liberal Democrats nor one of the Conservatives and the Ulster Unionists looked to be able to make up a majority, which may lead to political stalemate.
“It's as bad as it gets,” said a London-based trader. “Labour/Liberal Democrats cannot get a majority, Tory/Ulster Union cannot get a majority, Tory/LibDem won't deal with each other.”
But some analysts said the market reaction to the lack of political clarity in the UK was fairly muted, and instead sovereign risk problems in Europe were driving asset prices.
Many in the market believe sterling would have fallen anyway, as part of a global decline in risk appetite.
But overall risk aversion was doing no favours to sterling, as fears that Greece's debt crisis may spread to other eurozone nations triggered safe-haven demand for dollars.
“With such extreme nervousness coming from the Greek crisis and worries of a general loss of confidence and liquidity, we believe there is likely to be further downside pressure onsterling in the short run, at least against the $US,” Barclays said..