Market 'May-hem' after UK General Election spells trouble for the pound

This time two months ago, Theresa May was in quite a strong position. The Prime Minister was overseeing a majority government that was preparing for Brexit negotiations with the EU having triggered Article 50 only a month earlier with the backing of both the House of Commons and the House of Lords.

Two months on and May's vision of a strong and stable government taking on the EU is crumbling around her.

She now heads into the start of negotiations with the EU with no government majority and calls for her resignation amid numerous reports that Conservative party "colleagues" are making moves to replace her.

What at one point appeared to be a clever tactical move to improve her position both domestically, and in negotiations, suddenly looks like the mother of all political miscalculations.

The biggest problem facing May right now is that, rather than projecting a strong and stable image, she looks weak and vulnerable.

She's going into negotiations with an unclear mandate and lacking the necessary numbers to deliver what she wanted.

The reality may well be that she will now have to rely on the support of MPs outside of her own party - for instance Northern Ireland's Democratic Unionist Party (DUP) - which may involve softening her stance.

While this would ordinarily benefit the pound, the substantial uncertainty that exists in the UK is now weighing heavily on it. A hung parliament was always going to be the worst outcome for the pound due to the uncertainty.

And while the initial sell-off may have been a little less severe than it could have been – due to the ability of the Conservatives to come to an agreement with the DUP – further woes may lie ahead for the currency.

The FTSE 100 continues to be unfazed by the whole affair. As we've seen in the past – Brexit, US election etc – the initial shock triggered some knee jerk selling in the futures market but this didn't even last until Friday's open.

People were quick to buy the dips as the pound headed south – a good thing for many FTSE 100 companies – and the index ended Friday's session up more than 1%. Should the pound remain under pressure then this could continue to support the UK index.

Things should become a lot clearer over the next week as we see if May faces and survives any leadership challenges and forms a new cabinet. One must assume that once negotiations begin, MPs will be extremely reluctant to rock the boat and hand any further advantage to the EU.

A hugely important 21-month period lies ahead for the UK and while the process may have got off to a terrible start, it's imperative that those in charge refocus their attention to the matter of leaving the European Union with a good deal for the country. Otherwise the darkest days may yet lie ahead.

Craig Erlam is senior market analyst at foreign exchange and financial services provider OANDA, a company he joined in 2015. With years' of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary.