Sterling steadied on Monday as British Prime Minister Theresa May scrambled to pick up the pieces and reunite her Conservative Party after a disastrous election that could disrupt Brexit negotiations. Sterling last traded at $1.2743, little changed on the day, after sliding 1.7 percent on Friday, its biggest one-day drop in about eight months. The pound had tumbled by as much as 2.5 percent in the previous session to its lowest since mid-April after no single party won a clear claim to power in the UK election on Thursday — a result flagged by some analysts as the worst possible election outcome due to uncertainty. May is now trying to unite a disillusioned party around her to not only support her in the Brexit talks but also to strike a deal with a small Northern Irish party that will enable her to stay in power. Negotiations on Britain’s exit from the European Union are due to start next Monday. “There is still heightened uncertainty surrounding issues, including how the (British government’s) stance toward Brexit talks might change,” said Shinichiro Kadota, senior FX strategist for Barclays in Tokyo. “The lack of moves (in sterling) is more because the market is waiting for fresh information, rather than a sign that it is settling down,” he added.
Some market participants say sterling’s slump has been tempered by expectations from some investors that the government may pursue a softer stance on Brexit and even increase spending to assuage an austerity-weary electorate. The pound’s drop late last week has helped bolster the dollar, which last stood at 97.190 against a basket of six major rivals. The dollar index had risen to as high as 97.500 on Friday, its strongest level since May 30, and up from its June 7 trough of 96.511, which was its lowest level in nearly seven months. A key focus for markets this week is the U.S. Federal Reserve’s two-day policy meeting that ends on Wednesday.
With the Fed widely expected to raise interest rates, investors’ focus will be on any fresh hints on the pace of further tightening in the months to come and next year, and any details on its plans for trimming its balance sheet. The euro edged up 0.1 percent to $1.1207, staying below a seven-month high of $1.1285 set in early June. Projections after the first round of French parliamentary elections on Sunday showed that President Emmanuel Macron’s fledgling party is set to trounce France’s traditional main parties and secure a huge majority to push through his pro-business reforms. The projections were in line with expectations, and the euro showed little immediate reaction.