FxWirePro: Hung parliament to cause political distress on sterling

Highlights of UK elections:

• U.K. General Election ends in the hung parliament with Theresa May’s ruling Conservative party has won 312 seats while the opposition Labour Party has 260 seats. Meanwhile, the Scottish National Party (SNP) has won 34 seats, the Liberal Democrats are at 12 and the Democratic Unionist Party has secured 10. Voter turnout was at 68.6 percent, according to the BBC
• Results for key seats continue to roll in.

Hung parliament but the Conservative Party seems likely to form a minority government backed by the Democratic Unionist Party (DUP).

On a cautious note, the extremely lean majority brands it challenging for the new government to govern and it is likely to be put under pressure both by pro-Brexit and pro-EU forces. 

It is difficult to say what this means in terms of Brexit. The new government at least has some thinking to do about how it will proceed with the Brexit negotiations and whether or not to adopt a softer approach. 

Theresa May is currently considering her own position. Therefore, the Conservative Party may be thrown into a new leadership contest. 

A second Scottish independence referendum seems unlikely at this point given the SNP's loss of seats.

Given Brexit, Trump and, in a different way, Macron, perhaps we should not be that surprised by what has transpired in the UK election, where Theresa May has gone in the space of six weeks from unassailable leader, calling an (unnecessary) election to secure a widely-anticipated landslide win to what looks to be a lame-duck Prime Minister of a minority government able to govern only with the support of other parties.

As the UK heads into the Brexit negotiations scheduled to start in ten days (although if she does stand down, that timetable may slip further). And, indeed, the election result throws into doubt all sorts of previous assumptions about the type of Brexit that will be pursued. She had set out a vision of Brexit that was at the very hard end of the spectrum, in particular leaving both the single market and the customs union. And, as her election campaign had increasingly faltered, she had ramped up the Brexit rhetoric, including her (ridiculous) mantra that no deal is better than a bad deal. In the event that failed to attract in sufficient numbers those voters who had previously backed UKIP (which saw its vote share evaporate). Indeed, UKIP voters appear to have gone mainly to Labour, whose Brexit stance is less clear but certainly less confrontational than that of the Tories.

So, with the clock ticking on the Article 50 negotiations, what does this all mean for Brexit?

With respect to GBP, we now have a 'government risk premium' on top of the 'Brexit uncertainty premium'. We target EUR/GBP in the range of 0.84-0.90, cable to retest 1.23, while GBPJPY to hit around 135 levels.