UK election: What the early poll result means for the Sterling?

The early poll result, which came out at 21 GMT, has seen a major plunge in the value of the Sterling, after the British media's BBC/ITV/Sky connglomerate indicated that UK PM Theresa May's Conservatives will fall well short of a majority, with 314 sets vs 266 by Labour.

The British Pound was hammered over 250 pips against the US Dollar, last exchanging hands at 1.2750 lows - posted its cheapest level just below 1.27 - from early quotes at 1.2950.

It is worth noting that while pollsters have been notorisouly wrong predicting political outcomes in the last UK or US elections, the early exit polls carried out have been much more accurate on estimating the final results.

As Detuchse Bank Economist Peter Sidorov notes, "historically, these forecasts have been very accurate (within 15 seats for the winning party) but this means that if the exit poll projections are tight – i.e. within a 20 seat majority for the Tories - the margin of error means we may not know by 10pm which of the potential outcomes across small Conservative majority, Conservative minority or Labour coalition are the most likely."

Votes count underway, about to get interesting...

As a reminder, the vote count is currently underway since 10pm UK time, with the first results typically declared between 11pm and midnight UK time. However, it will not be until 00 GMT to 2 GMT, that the bulk of the declarations will be out. By 4am London time, about 50% of the vote counts should be out and that would allow for better clarity. Lastly, by around 6am, close to 90% of the vote count will be declared. 

What next for the Pound?

Against such backdrop, what does the early exit poll in the UK mean for the Sterling in the hours ahead, as the first actual results start to be released? What it means, for now, is that the actual risk of a hung parliament just got greater, and as such, the immediate decline in the Pound. 

A hung parliament scenario with either a minority Conservative government or a Labour-led alliance offers an ugly picture for what was initially intended, that is, a strong political mandate to negotatite the best possible Brexit terms with the EU. Traders perceive such scenario as one of the worst short term outcomes for the Sterling, baring in mind how much of a majority Conservative-led government has been priced in, ever since the UK general election was first announced. 

In order for the Sterling to regain ground from current levels, and considering that the current Tory majority is 17, a majority of 50+ should be a good outcome for Theresa May and would probably see a kneejerk GBP bounce fi that materializes. However, as long as there is no evidence on the conservative achieving such majority outcome, that should keep GBP pressured in thin Asia liquidity.

Lastly, the worst possible outcome for the Sterling, a scenario that has been assigned no more than a 5% chance, would be a Labour win. Under such circumstances, the short term selling pressure ont the Sterling would only increase, as it would represent a complete 'shocker' for the market, and would lead to a major turnaround on how the whole Brexit process is being approached. While mid-term that could be a Sterling positive, short term, such an unexpected outcome would be quite catastrophic for the interest of GBP longs.