The pound is trading sharply lower against the dollar after voters in the U.K. denied Prime Minister Theresa May a parliamentary majority in a crucial general election.
The British currency dropped about 1.6% to trade above $1.27 after an exit poll showed that May’s Conservative Party would struggle to hold on to a majority. The poll, which was published as soon as voting ended on Thursday, also caused the pound to fall against the euro.
By Friday morning in the U.K., official results had confirmed that no single party had won enough seats to secure an overall majority.
The results 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.
“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.”
The pound remained volatile as results came in, repeatedly shedding as much as 2% to below $1.27 before regaining some ground.
It had been trading comfortably above $1.29 during the day 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. It 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 … is that there will be some instability and it will be hard for the British government to negotiate on Brexit.”
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 EU.
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.
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.
— Charles Riley and Jethro Mullen contributed to this report.