The UK election just got interesting

UK Prime Minister Theresa May arrives at the launch of the Conservative Party's Election Manifesto, in Halifax, on May 18, 2017.

Story highlights

  • Projection suggests May might lose her parliamentary majority in the looming election
  • A hung parliament could lead to a 'softer' Brexit
  • Pound fell sharply after the projection's release

(CNN)Since British Prime Minister Theresa May called her snap election last month, the conventional wisdom was that she would significantly increase her parliamentary majority. That was, after all, the reason she announced the vote.

But on Wednesday the race was electrified when a projection by the polling company YouGov suggested that far from winning a landslide, May's majority would be wiped out -- and that the opposition Labour Party could form a government by partnering with a smaller group such as the Scottish nationalists.
The projection sent shockwaves through Westminster, and rattled May's Conservative Party. In the wake of the news the Labour leader, Jeremy Corbyn, sprung a surprise announcement: that he would attend a televised BBC debate with the other main party leaders. May, who always said she would not debate Corbyn head-to-head, was left backed into a corner.

    What this would mean for May

    The latest projection would be a disaster for May.
    The projection came with big caveats -- including a vast margin of error. Other polls in recent days predict May's majority is safe. But it was the first time that a so-called "hung parliament" -- where no one party has an overall majority -- has been predicted.
    If the projection is right, it would be a disaster for the Prime Minister. She called the election three years early to increase her majority, currently 17 seats, so she could strengthen her negotiating hand in Brexit talks with the rest of Europe. She has made the election about her personal authority and her "strong and stable" leadership.
    The 2015 election led to the first majority Conservative government for 18 years -- and she would have thrown that power away in the space of two years. In these circumstances, there would be huge pressure from inside her own party for her to resign.

    What this would mean for Brexit

    The Bexit process could be turned upside down.
    Whatever the outcome of the election, Britain's exit from the European Union is still on. The Article 50 process has been triggered, meaning Britain must leave the EU by March 2019. But a hung parliament could throw the process into the air.
    At the moment, May is pushing for a "hard Brexit" where Britain severs ties completely with the EU, including the single market. A hung parliament would automatically trigger coalition talks between the major opposition parties, all of which have differing views on how Brexit should be approached.
    If the Conservatives were still the largest party, they might try to form a coalition with the Liberal Democrats, as they did in 2010. But the Liberal Democrats are anti-Brexit, and may try to seek a deal with Labour, who want Britain to keep some aspects of EU membership. Any party that wanted to form a government could also seek the support of the Scottish National Party, which is anti-Brexit but also wants to break up the United Kingdom.
    Detailed Brexit negotiations between Britain and the EU are set to start 11 days after the election, so there will be intense pressure to form a government by then.
    Even if May can cling on to power -- say, if she keeps her majority but it is reduced to single figures -- her authority will be severely undermined and Brexit negotiators in Brussels will be confident they can weaken Britain's hand in talks.

    What this would mean for the markets

      When the YouGov projection was first published by The Times on Tuesday evening, the pound dipped in response, although it recovered slightly by Wednesday morning.
      The sharp reaction suggests that the currency markets are not prepared for a hung parliament, given all other polls have been pointing to a victory for May on June 8. The currency and financial markets matter in all elections, but given this one is happening during Brexit, any uncertainty and instability is amplified.