UK election: Conservatives fall short of majority, May's political gamble backfires

Against all odds, and is becoming a familiar pattern in major political events, a catastrophic and unexpected outcome for UK PM Theresa May's Conservatives has materialized. While the Conservative party managed to get a minor win, which guarantees they are set to be the largest party in the UK parliament, it fell well short of a majority.

With over 30+ seats still to go out of a total of 650, Tories have taken the largest portion, although the news of the night was the outperformance by the Labour party. The projections are that she will lose 17 seats from the current parliamentary seats prior to the election day.

BBC forecasts a Hung parliament, with Tories the biggest party

Exit poll painted an ugly picture from the get go...

Right from the beginning of the night, the picture turned very ugly for the interest of Conservatives, after the first exit polls showed Conservatives' lead of 314 vs. Labour 266, which was a major upset for market; as a result, we saw the Sterling fall over 250 pips from 1.2950s, down towards 1.27 bids. The British media's first exit polls (BBC/ITV/Sky), which historically tends to be fairly accurate ith small error margins, turned out to be, yet again, a decent approximation. 

After the exit poll, among others, former UK Finance Minister Osborne, noted that such an exit poll result was "completely catastrophic" for the conservative party. That view was shared across the country, as PM May's gamble had clearly backfired. 

Throughout the night, a clear pattern of Labour outperforming vs Conservative's developed, reinforcing the notion that the UK is set to face yet another political storm as the fears of a hung parliament grew.

As results kept pouring in, UK Prime Minister Theresa May gave her constituency win speech, sounding obviously disppointed as a new unexpected reality was in full motion. As the Guardian wrote: "There was also a curious bit at the start of the speech when she talked about looking forward to continuing to work on improving the constituency. It is likely that May has not taken any final decisions, but she sounded like someone preparing mentally to make way for a successor."

The Scottish National Party and the UK Independent Party were the main losers of the night, other than Theresa May's wrong gamble to seek a stronger mandate. Eventually, the loss of votes towards the SNP and UKIP was not enough to swing the results strongly enough to allow a minor win for the Labour, which if it had materialized, would have probably been the mother of all politcial upsets. 

A hung parliament creates major uncertainty

Analysts at ING explained that in coming days, the environment it creates is one of "massive uncertainty for markets and the outlook for brexit negotiations." ING expanded by noting that "a change of strategy at this point (given that there are only 21 of the 24 months set aside for negotiations left) and if the parties are not united could lead to an unclear negotiating position. This would make winning a good Brexit deal for the UK more challenging. Nonetheless, we have to remember this is just an exit poll of 30,000 people, the real results could be very different."

Kit Juckes, economist at Societe Generale, was quoted in FXStreet, noted  "this is going to leave T May struggling to keep control of the Brexit process", adding that "can't see how that's helpful for the pound..."

A hung parliament scenario with either a minority Conservative government or a Labour-led alliance offers a very worrying picture indeed. A hung parliament without a working government represents major instability in the UK political arena, at a time when they need it the most, therefore, investors around the world, may turn their backs against the Pound for the time being, which "could fall to as low as 1.24 against the dollar", ING notes. 

Possible scenarios to unfold in coming days

A hung parliament is a disaster for Theresa May as she would require DUP/UUP votes (8-11) to stay on, considering they lose 8-18. On top of that, the Tories might be foced to replace her with Boris Johnson, David Davis or Amber Rudd. If May wins by a higher margin (loses less than than 8 seats), it would still be humilliating for May, but she will stick with “Brexit is Brexit; a win is a win”, and she would keep her mandate. 

As per the Sterling, there are several scenarios at play to assess the right valuation. There has been talk that May's political career is practically over after the worsening position she will hold to negotiate Brexit. While short term a hung parliament increases the tail risk of further GBP selling, it will not be until we learn about the configuration of the new UK government, that real money and greater conviction on the next direction will be defined. At present, a hung parliament equals 'uncertainty', and this perception alone should keep the Pound pressured.