LONDON — The British pound dropped sharply on Thursday evening after the exit poll suggested that no party will win a majority in the House of Commons after 2017's general election.
The exit poll, which in recent elections has proved to be a fairly accurate forecast of the official result, showed Theresa May's Conservative Party as the biggest individual party, heading for 314 seats in the House of Commons, 12 short of a majority.
Jeremy Corbyn's Labour Party are projected to be the second party, on 266 seats. Many forecasters had predicted the Conservatives could win a majority of up to 100 seats.
Of course, the exit poll could be wrong, but investors initially took its findings as evidence that Britain is headed for a hung parliament, meaning a government will not be formed immediately, as would be the case if a majority was won.
Sterling dropped sharply on the exit poll, losing close to 2%, but by 11.20 p.m. BST (6.20 p.m. ET) it has retraced a little bit of its loss after early results from the North East of England showed a smaller swing from the Conservatives to Labour than had been forecast by the exit poll. Here's how it looks:
The rationale behind this move is simply that markets dislike political uncertainty, so the prospect of a period without a government, particularly as the UK heads towards the beginning of formal Brexit negotiations, is not a nice one for investors.
"Sterling has fallen off a cliff after the initial exit poll. A hung parliament is the worst outcome from a markets perspective as it creates another layer of uncertainty ahead of the Brexit negotiations and chips away at what is already a short timeline to secure a deal for Britain," Craig Erlam, senior market analyst at Oanda wrote in an email.
"GBPUSD fell more than 2 cents immediately after the exit poll and looks very vulnerable to further downside."
"This exit poll is a thunderbolt that leaves only two outcomes realistically in play; a slender Tory majority or a hung parliament," Samuel Tombs of Pantheon Macroeconomics wrote in an emailed statement, adding "Settle in for a long night."
While sterling's drop so far is substantial, it pales in comparison to its fall after Britain voted to leave the European Union last June. Here's the chart, showing the respective drops:
Sterling also remains a little above the level it traded at prior to May calling a the election in mid-April.