Pound drops on uncertain U.K. election outcome

Posted June 8, 2017 5:58 p.m. EDT

An exit poll suggesting that British Prime Minister Theresa May may have lost her parliamentary majority in a general election on Thursday sent the pound falling against the dollar.

The pound dropped about 1.6% to trade above $1.27 in the immediate aftermath of the projection, which was published as soon as voting ended at 5 pm ET. It registered a similar fall against the euro.

If the exit poll is confirmed by actual results, it would raise big questions about whether May can remain as U.K. leader and lead the country into vital negotiations on the country's exit from the European Union, due to start on June 19.

"There will be other polls, and results will come out through the night, but this is going to leave Theresa May struggling to keep control of the Brexit process," said Kit Juckes, strategist at Societe Generale. "Can't see how that's helpful for the pound even if we are somewhat braced for a close outcome."

General election 2017: Latest updates

The currency was trading at $1.29 earlier on Thursday. That's 14% lower than its level on the day of the Brexit referendum nearly a year ago. Since then it has traded as low as $1.20.

The situation where no party has a majority is known as a hung Parliament. That could plunge the country into a prolonged period of political uncertainty and horsetrading over the formation of a coalition government, or possibly even another election.

"On balance, the financial markets and the private sector would have preferred a Conservative majority to a Labour majority ... and they definitely prefer stability to instability," said Tony Travers, director of the Institute of Public Affairs at the London School of Economics.

"What this result suggests, if it holds, is that there will be some instability and it will be hard for the British government to negotiate on Brexit."

Related: U.K. growth was weakest in Europe in first quarter

Apart from dealing with Brexit -- in itself the biggest challenge the country has faced since World War II -- the new government has to address Britain's acute growth problem.

The U.K. economy, which was until recently the strongest performer in Europe, has fallen to the bottom of the growth league, delivering weaker expansion in the first quarter than the other 27 members of the European Union.

And while unemployment is very low, the country has been struggling with low wage growth since the global financial crisis. Wages fell in the three months to March, after taking inflation into account.

Related: CNNMoney's Brexit jobs tracker

Brits have already endured nearly a decade of stagnating real wages. According to the independent Institute for Fiscal Studies, average earnings are still substantially below the levels seen in 2008, before the financial crisis.