Hung parliament adds government risk premium to GBP

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

• The very slim majority makes it difficult 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.

• 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.

Very much against expectations, Theresa May and the Conservative Party fell short of winning enough seats to win a clear majority in the House of Commons. Hence, we have a hung parliament with the Conservative Party as the biggest party. Still, the Conservatives may have won enough seats to remain in power, as Sinn Féin in Northern Ireland has said it will not take its seats (seven seats) and the DUP has said it is willing to cooperate with Theresa May (DUP won 10 seats). Jeffrey Donaldson, an MP from the DUP, has said, ‘we have a lot in common, we want to see Brexit work, we want to see the Union strengthened. I think there is a lot of common ground'.  Based on the current projections, we think it is likely that the Conservatives will form a minority government supported by the DUP but it will have a hard time manoeuvring in the House of Commons. It may take at least a few days to form a new government, as the Conservatives probably need to talk with the DUP. Given the very slim majority, it is possible that the new election term will not last the supposed five years, as the government will be weak, not least in connection with upcoming Brexit negotiations.

Theresa May's position has clearly weakened and there is some pressure for her to resign as leader, as the entire Conservative campaign centred on her as a person and her ability to be a stable leader in uncertain times. In her victory speech in her own constituency, Theresa May said that the UK now needs ‘a period of stability' without saying whether she wants to stay or not. At least, it was quite interesting that May said that it is the Conservative Party's aim to ensure stability and form a government and not hers. Sources say it will be 50/50 as to whether she resigns or not. Brexit negotiations should have begun in 11 days' time but this seems unlikely given the Conservative Party has now been thrown into a new leadership contest.

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