Sterling fell 1.5% to 1.27 US dollars in overnight Asian trading and over 1.5% to 1.13 euros, but most of the losses came following a shock exit poll late on Thursday.
Craig Erlam, senior market analyst at OANDA, said that there was “no panic yet”.
“The drop in GBP/USD after the exit polls was very significant but even then, it remains slightly above the level that it was trading at prior to (Theresa) May calling the election back in April.
“Clearly there is no panic yet but should coalition talks fail and the prospect of another election prevail, I struggle to see it maintaining
these levels and it would seriously harm the UK’s position in Brexit talks and create huge uncertainty.”
Markets had priced in a healthy Conservative majority, giving Theresa May free rein to take charge of Brexit negotiations unhindered.
However, others believe that a hung parliament increases the likelihood of a softer Brexit, which could be supporting the pound and
preventing it going into freefall. Kathleen Brooks, research director at City Index, said: “Perhaps the market is looking at this result as a vote for a softer Brexit, which could boost the pound in the long run.”