GBP: May day? - Rabobank

Since the Conservatives were the only major Party fighting this election on a policy of hard Brexit, the market is beginning to wonder whether this commitment could now be watered down suggests Jane Foley, Senior FX Strategist at Rabobank.

Key Quotes

“Although May has failed to win an outright majority, the Conservatives remain the largest party in Westminster.  The Conservatives have 318 seat, which is 8 short of an outright majority.  Sir Jeffrey Donaldson the DUP (Ulster Unionists) leader in Westminster is reported to have indicated that his party would support the Tories on an informal basis.  The DUP won 10 seats last night.  While this could provide sufficient support for the Tories to announce they can form a government, it would leave it in a shaky position and it could make some of its policies more difficult to sell to parliament.”

“Even though the DUP are aligned with the Tories on favouring Brexit, it maintains a reluctance to reinstate a physical border across the island of Ireland and campaigned this year to maintain the Common Travel Area, to ensure a frictionless border and ease of trade throughout the EU.  These demands could conceivably water down the government’s hard Brexit plans.  The EU27 have already made clear that it wishes to address question of a border between Northern Ireland and the Republic well before any trade negotiations are entered into.”

“For GBP, the overwhelming theme this morning is that of uncertainty.  Although it is being reported that PM May will seek permission from the Queen to form a government, it is clear that the knives are being sharpened within her own party and she may not be able to hold power for long.  If a government can be formed quickly, GBP is likely to gather some support.   However, any delay to the start of the Brexit talks on June 19 will not be welcomed.  A delay would seem likely if anyone by May or potentially Davis was at the helm.  Brexit Secretary Davis, along with Johnson and Fallon are been discussed in the press as possibly replacement to May. Although Fallon is considered to be a Eurosceptic, like May he voted pre-Remain at last year’s Brexit referendum.  Johnson was a high profile supporter of the Leave campaign.”

“Although hope for a softer Brexit have likely prevented a more drastic plunge for the pound this morning, a choppy period is in store.  A break of the GBP/USD1.26 area would expose the April low at 1.2351, although the recent softer tone of the USD should also provide support.  The GBP/USD1.2770 level provides an important resistance.”