UBS: Don't chase short-term weakness in the British pound

UBS is telling investors not to bet on a sustained pound weakness following the hung British election verdict.

While saying a hung parliament raised political and economic uncertainty, UBS strategists led by John Wraith cautioned against chasing short-term sterling weakness as the market may reassess Brexit risks.

They had this to say:

"A hung parliament increases domestic uncertainty and clearly complicates the UK's position at the upcoming EU negotiations. In the near term, the market may reflect this via a weaker pound, but we would caution against chasing cable lower from here.

Today's result will in part be seen as a vote against a definitive break from the EU, and the market may soon begin to reassess the probability of a so called hard Brexit. A Tory minority may have to make concessions in the direction of a softer exit (which the other EU countries may also be willing to accommodate, for example via a more generous transitional period than otherwise).

Brexit risks and current account related stress are key factors behind our bearish sterling view; today's result has the potential to reduce those risks and may warrant less sterling depreciation than we originally thought.

The Tories have lost their majority in the House of Commons, with the decision to call an early election backfiring on British prime minister Theresa May.

It’s a hung parliament with the Tories are expected to reach 318 seats, short of the 326 required to form a majority government.

The pound dropped sharply on Thursday evening after the exit poll initially showed that no party would win a majority in the House of Commons. A short time ago it was trading at $US1.27, its lowest level since mid April.

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