Sterling dipped more than 2% against the dollar in early trading but recouped some of its losses to sit around 1.4% ($1.28) down just after midday on Friday.
Against the euro, sterling fell 1.2% just after midday to reach €1.14.
The fall in sterling saw the FTSE 100 rise 0.36% just after midday, while the FTSE 250 dropped 0.48%.
Muted response
Nick Mustoe, Invesco Perpetual chief investment officer, said: “Market reaction has so far been fairly muted. What we’ve seen in previous events such as Brexit is that the greater moves come from currency markets but these are likely to be relatively small [on Friday].
John Richards, product director of Invesco Perpetual UK Equities team, added: “In terms of market reaction, the sharp fall in sterling seen overnight is unsurprising, echoing the dramatic moves in currency markets following last year’s vote for Brexit; currency will remain a key instrument to watch as developments unfold.
“There has been some divergence in the performance of the internationally-weighted FTSE 100 index versus the more domestically-oriented FTSE 250, inevitably resulting in pressure on the share prices of companies perceived to be closely correlated with the UK economy.
“Ultimately, UK companies have withstood the numerous and variant political surprises of the recent period; we will continue to make considered judgments on the basis of the facts as they emerge, investing in businesses that have the financial and management resources to improve or transform their prospects regardless of the shifting political and economic backdrop.”
Hard choices
Nick Dixon, investment director at Aegon, said: “In the short term, a hung parliament brings political uncertainty, which will hurt sterling and UK-focused assets, but simultaneously create bright spots for internationally focused FTSE large caps that generate earnings in dollars and euros.
“Over the longer term, there are two main implications. Firstly, the probability of soft Brexit has increased, which would be a positive outcome for Sterling but conversely may weigh on the value of the same FTSE large caps.
“Fundamentally, a weaker majority will make it politically difficult for any government to make hard choices across spending and tax. The government deficit is therefore likely to be higher than current forecasts, which would lift gilt rates above the current yield curve, while posing significant risks for both gilt prices and other fixed income bond proxies.”
Weaker sterling
Gero Jung, chief economist at Mirabaud Asset Management said: “The UK election outcome of a hung parliament – with no party decisively winning – implies that trying to get things done will be more difficult. Higher political uncertainty is certainly likely to impact the beginning of the Brexit negotiations but also fiscal policy.
“As to investment implications, we believe that the main short-term transmission mechanism is likely to be felt in the currency space, and we re-iterate our view of a weaker pound sterling. While equity markets will react, we do not expect a sharp fall in the short term and do not change our neutral stance on UK equities.”
UK issue
Mike Pinggera, manager of the Sanlam Four multi-strategy fund, said: “Market moves over the next few weeks may throw up some good long-term opportunities, but to a large extent, this is a domestic issue for the UK.
“We will look to see if there are opportunities to deploy some of our cash. However, while equity volatility remains low, we would rather participate in any future equity upside by owning options, where the downside is clearly controlled. The uncertainties have increased, particularly over the future of Brexit negotiations.”
