UK election insight: where will the pound be on a Conservative blow out?

We all had an idea where the pound could get to on a conservative victory. But, it is not stacking up for the Tories today and risks are heavily weighted to the downside for Sterling on the basis of a hung parliament. 

FTSE 100 futures drop 0.7% despite losses in the Pound

There are a number of considerations. Brexit and a government not able to to make a clear policy line on that. this could even equate to an additional General election within the next year. 

As analysts at ING put it, a ungh parliament = GBP chaos as May’s election gamble looks to have failed to pay off.

• "We noted that maximum chaos would be if the Conservatives are only able to get somewhere between 290 to 325 seats; it’s the grey area where it’s not enough for a Conservative majority, but also potentially not enough to see a stable Labour-led coalition being formed quickly.
• The margin of error on exit polls is typically low and at best it shows that Tories might just be able to get an overall majority. But even a slim Tory majority is unlikely to be convincing enough to suggest that Theresa May’s election gamble has paid off. Potential pressure for the Prime Minister to resign would only add to political uncertainty and further add to the pound’s woes.
• The best playbook for the pound under a hung parliament is the 2010 election; GBP/USD continued to fall in the days after the election as major parties scrambled around to form a coalition. Under a similar environment, we wouldn’t rule out GBP/USD falling to as low as 1.24 and EUR/GBP moving up towards 0.90."

A hung parliament, as explained, is expected to be highly bearish for the pound due to the uncertainty for markets to deal with. However, in a hung parliament, the incumbent prime minister stays in office until it is decided who will attempt to form a new government - this could support the pound after an initial sell-off. (Note: A hung parliament does NOT necessarily mean a coalition government).  

The pound could well be volatile for some time, but even May has said if she lost just six seats she would resign. Corbyn could well become prime minister and a Labour government could actually turn out to be a positive for the pound.  Due to increased uncertainty, the pound will be fragile due to a reduction of inflows. However, a Labour victory should mean a softer Brexit outlook and austerity would be removed, (Fiscal easing lifting growth and inflation expectations). Higher real yields may offset the initial weakness in the pound. 1.3200 and 1.3428, (the rally's high when PM May was appointed), are the upside targets.

Note: (with markets a little more concerned and less convinced by US data and inflation, that could also be supportive for higher levels in the pound.)