Pound sinks amid political jitters, Moody's election warning

Sterling slipped back below $1.27 on Monday amid UK political instability as Theresa May met with Conservative party MPs to argue for her future as the Prime Minister, while doubts were cast over the country's credit rating.

Ratings agency Moody's suggested the Friday's election result, where the Tories lost their majority and are yet to strike an agreement to form a government, is credit-negative for the country.

Moody's says the complex result, where the Conservatives' 318 seats in the House of Commons fell short of the 326 needed to govern, will "complicate and probably delay" Brexit negotiations.

Bookmakers had slashed their odds on another UK election being called this year or in 2018.

The credit agency said fiscal risks could increase because efforts to get the budget in a healthier state will now been as a lower priority for the country's lawmakers.

On the other hand, Moody's observed that the British government could consider "softer" Brexit options, which may ultimately be "credit positive".

The report hit sentiment around the pound, which had held stable around $1.274 since the election but on Monday it slipped 0.5% to 1.2685.

"This seems to have woken traders from their slumber and the pound is on the defensive as we start the week," said analyst Neil Wilson of ETX Capital.

"It wouldn’t take much bad news from the UK political scene to force cable to take another leg lower. Still there is plenty of bid to catch on the way down as the dips are being viewed as short-term buying opportunities."

But he said sentiment generally was pretty bearish.

"As Moody’s points out there is a chance of a softer Brexit but we must also think there is a heightened risk of a cliff-edge exit from the EU.”

On Monday, following several calls to resign since Thursday’s election, May faced a group of senior Conservative MPs in a crunch meeting as she looks try and win backbench support following the unexpected loss of the party's majority last week.

Alongside calls from Chancellor Philip Hammond and defence secretary Michael Fallon for May to soften her line on Brexit, the influential 1922 backbench committee was aiming to increase the pressure on May's former hard Brexit stance, with her focus on securing controls on immigration thought to be unpopular among many backbenchers.

Concerns will also be raised about the "confidence and supply" pact that May claimed on Friday to have struck with the DUP but was revealed over the weekend to have not yet been agreed, and which has garnered criticism from most corners of the political spectrum.