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• 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'. See also Reuters. 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.

Although the polls showed the Conservatives' lead over Labour diminished throughout the election campaign, only a few predicted it would be this close. One reason is that the turnout among young voters – mainly Labour leaning – was higher than in previous elections. Despite the Conservatives winning some of the previous UKIP voters (UKIP totally collapsed from nearly 13% of the votes in 2015 to around 2% now), it was not enough for the Conservatives to increase the number of seats. Overall, the election was a major blow for Theresa May, as prior to it, she was close to 20 percentage points ahead of Labour and Jeremy Corbyn was viewed as a weak leader – now it is quite the opposite.

In Scotland, it is also interesting that the Scottish National Party lost many of the seats they won in the last election in 2015. This – combined with polls suggesting that the Scotsmen want to remain in the United Kingdom – makes it less likely we will get a second Scottish independence referendum.

Brexit clock is ticking but we do not know whether a new government will change the 'hard Brexit' approach

It is difficult to say what this means in terms of Brexit. On the one hand, this could be viewed as a rejection of Theresa May's hard Brexit stance with the UK leaving the single market and the customs union. However, given the election campaign was more about domestic issues like austerity, social care and education than Brexit, it may also be the case that Brexit voters have simply moved on to other issues, as they expect the government to move forward on 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. Unfortunately, time is short, as there is a sharp deadline by the end of March 2019, where the UK is due to formally exit the EU. No matter which Brexit approach the new government takes, the slim majority means it will be put under pressure both by pro-Brexit and pro-EU forces in parliament. One of the reasons for Theresa May to call for a snap election was to consolidate power within the Conservative Party and the House of Commons, making it easier for her to negotiate Brexit, but the election result has actually made it more difficult. One game changer could be more cooperation across the political centre between moderate Conservatives and moderate Labour MPs.

GBP: worst-case outcome adds to Brexit risk premium

So far, the election outcome looks close to the worst possible for sterling – if any winner, it may be regarded the EU. The prospect of a hung UK parliament based on the first exit poll initially led EUR/GBP to jump above the 0.88 level last night but the knee-jerk reaction has been moderated a bit with the possibility of a Tory-led government that may just about get a slim majority and the cross is trading around 0.8780 at the time of writing. What matters for sterling near term is the strength of the government that goes to Brussels to negotiate Brexit terms on behalf of the UK – and with any possible governing coalition set to be weak, so will GBP be. There is clearly a risk of EUR/GBP breaking above 0.88 again if the Tories fall short of even a slim majority. Notably, speculators covered GBP shorts ahead of the election, suggesting room for speculative GBP selling near term. What matters for the sterling longer term are the Brexit terms – and the prospect for these have not become more favourable following the present election result as negotiation power has essentially shifted from the UK to the EU. However, if the new government adopts a softer Brexit approach it may be GBP positive later on, but it is obviously very speculative at this point.

Our Brexit-corrected medium-term valuation (MEVA) model estimate for EUR/GBP is around 0.83, which notably suggests that even when Brexit uncertainty is out of the way, GBP is not necessarily set for large-scale appreciation. But it remains too early to judge e.g. the implications for trade terms from this election outcome. On top of the 'Brexit uncertainty premium', which has been haunting GBP markets since June last year, a form of 'government risk premium' has now been introduced for the very short term as well: almost irrespective of what government is formed, the UK will not be heading for Brexit negotiations with any great sense of confidence based on the election result as it stands at present, and this will weigh on the pound. We see EUR/GBP in the 0.84-0.90 range near term.

A wildcard for GBP would be a new election: while this would introduce continued uncertainty for the short term, it would also open up the option of a majority government after voters had their say again, and possibly be GBP positive eventually that way around

Daily Pivots: (S1) 1.0835; (P) 1.0855; (R1) 1.0866; More...

The corrective fall from 1.0986 short term top is still in progress. Outlook in EUR/CHF is unchanged. Downside is expected to be contained by 1.0791/0872 support zone, probably around 55 day EMA (now at 1.0830 and bring rebound. Above 1.0902 minor resistance will turn bias back to the upside for 1.0986/0999.

In the bigger picture, the price actions from 1.1198 are seen as a corrective move. Such correction could have completed after defending 38.2% retracement of 0.9771 to 1.1198 at 1.0653. Decisive break of 1.0999 resistance will target a test on 1.1198 high. For now, this will be the preferred case as long as 1.0791 support holds.

The UK's general elections result is likely to see more uncertaintyin the near future for the British pound. Although votes are still being counted, the prospects of a hung parliament are starting to become a reality, which could influence the Brexit negotiations that start in just 10-days.

Theresa May's Conservative party is seen winning 315 - 325 seats, according to projections from Sky News. The idea of calling for a snap election has now also brought Ms. May's leadership under the scanner. In a speech, Ms. May called for stability but refused to comment any further.

Elsewhere, the Euro closed bearish after yesterday's ECB meeting saw no major changes from the central bank. The market reaction was mostly muted, largely thanks to the leaks that emerged a day before the ECB meeting.

The developments sent the USDollar index higher as the buck has posted two consecutive days of gains after slipping to a 7-month low.

EURUSD intraday analysis

EURUSD (1.1202): EURUSD slipped to 1.1200 support level yesterday with price action currently seeing some consolidation at this support level. The bias, however, remains in favor to the upside with the bull flag pattern still in play. Only a decline to 1.1100 and below will flip the bias. On the 4-hour chart, price action shows an ascending wedge pattern from which price broke out yesterday. We currently notice a retracement and the upside could be limited to 1.1245. Failure to breakout above 1.1245 will signal a possible reversal with 1.1100 in focus.

GBPUSD intraday analysis

GBPUSD (1.2755): The British pound broke past the 1.2800 support level earlier today, and this confirms the downside in prices. The head and shoulders pattern from the daily chart is now in play, and we can expect to see a decline to the projected target of 1.2600. There is possible scope for further downside to come, with the next main support seen at 1.2400. This is a key support level that is pending a retest, so the likelihood of the downside in the GBPUSD is high.

USDJPY intraday analysis

USDJPY (110.24): USDJPY has managed to lift off comfortably from the support level formed near 109.50 - 109.25 that was mentioned earlier this week. Price action is expected to continue to the upside with 110.79 now the next main target. A daily close above this level will see price reversing from the opening price of 110.435 from 6th June. A bullish continuation here will signal the upside with USDJPY potentially eyeing for 112.50 if the breakout above 110.79 can be sustained. To the downside, the support zone of 109.50 - 109.25 will remain key and a break down below this level will see price slip back to 108.30.

Sunrise Market Commentary

• Rates: Event risk left no traces on Bunds/Treasuries
  Markets can digest the ECB meeting and the outcome of the UK elections today. The passive initial reactions suggest that focus will turn to next week's Fed meeting though. Ahead of the weekend and with this week's three event risks out of the way, investors might take some chips off the table and close some long positions in Bunds/US Treasuries.
• Currencies: Sterling hammered as UK election results in a hung Parliament
  Overnight, sterling fell off a cliff as UK PM May failed to secure a parliamentary majority. EUR/GBP is nearing the 2017 top. In EMU and in the US, the calendar is thin. The dollar bottomed out yesterday, but we don't see a trigger for sustained further gains right now. Next week, the focus for USD trading will shift to the Fed meeting

The Sunrise Headlines

• US equities ended close to unchanged and weren't affected by Comey's testimony. Overnight, Asian stock markets are mixed. The UK's election disaster doesn't impact global market sentiment.
• Britain's general election has resulted in a hung parliament. The Conservatives will be the largest party in the Commons followed by the Labour party who are the biggest winners in another shock night for British politics.
• Former FBI Director Comey told senators that he felt President Trump had directed him to drop an investigation into a former adviser, and that after his firing he leaked accounts of his conversations with the president in hopes of sparking the appointment of a special counsel.
• China's PPI eased for the third straight month in May on tumbling prices of raw materials, signalling a broader cooling in economic activity as profits are squeezed by slackening domestic demand and rising financing costs.
• US House Republicans approved a sweeping bill ripping up major aspects of the Dodd-Frank Act. The legislation has little chance of passing the Senate in its current form as this would require support from Democrats.
• Banco Popular burnt through €3.6bn of emergency central bank funding in the first two days of this week as the Spanish lender suffered the eurozone's first large scale bank run, according to two people involved in the situation.
• Today's eco calendar is thin with only UK industrial production. ECB Nowotny and Rimsevics are scheduled to speak

Currencies: Sterling Hammered As UK Election Results In A Hung Parliament

Dollar and euro little changed on UK election result

Yesterday, the focus for global (currency) trading was on the ECB policy decision and on the testimony of former FBI chief Comey. The ECB made only a small incremental step to policy normalisation. Markets were positioned for a slightly bigger step. The euro lost modest ground and dropped temporary to the 1.12 area. The hearing of Comey had no main negative impact on the dollar. EUR/USD closed the session at 1.1214. USD/JPY made a comeback, closing the day at 110.02.

Overnight, Asian equities are trading mixed. The UK election result is dominating the headlines, but understandably it is no big issue for Asian trading. The China May CPI rose in line with expectations. USD/JPY is little changed at 110.15. EUR/USD lost a few ticks as cable sold off early in Asia, but changes are also limited. The pair trades again in the 1.12 area.

The eco calendar in Europe and the US is uneventful. The focus is on the UK election outcome that raises a lot uncertainties on the Brexit negotiations. However, we see no major negative consequences for Europe or the euro. If anything, the tactical position of Europe in the negotiations is probably strengthened. So, with the ECB meeting and the Comey testimony out of the way, we expect technical, order driven trading for EUR/USD and USD/JPY. Next week, the focus will turn to the Fed meeting, but we doubt it will already play a big role today.

Yesterday, the dollar showed tentative signs of bottoming out process. In a daya- day perspective, we are neutral on USD/JPY . EUR/USD might feel some slight downward pressure after yesterday's soft ECB. A further sharply decline of cable, if it would occur, might be temporary a marginal negative for EUR/USD, but we don't expect it to be lasting or significant. We still think that topside in EUR/USD is tough.

Technical picture

The USD/JPY rally ran into resistance in early May. A mini sell-off pushed the pair below the previous top (112.20), making the short-term picture negative. The post-payrolls USD sell-off below 110 deteriorated the picture further. The pair declined further in the 108.13/114.37 range. Over the previous days, the USD/JPY decline slowed. However, there is no convincing sign of a U-turn yet.

Earlier in May, EUR/USD failed to break below the 1.0821/1.0778 support (gap). Poor US data and US political upheaval propelled EUR/USD north of the 1.1023 range top. The pair initially reached a short-term correction top at 1.1268. There was a minor break after Friday's disappointing US payrolls, but no sustained follow-through gains occurred. The Trump top/correction top at 1.1300/1.1366 is next resistance. USD sentiment will have to be quite negative to clear this hurdle short-term. A return below 1.1023 would indicate that the upside momentum has eased.

EUR/USD topside test rejected, but correction remains very modest

EUR/GBP

Sterling falls off a cliff

Sterling traders had quite a boring trading session yesterday as markets awaited the outcome of the UK Parliamentary election. Especially EUR/GBP trading initially developed in a tight range below 0.87. Remarkably, EUR/GBP was hardly affected by the EUR/USD decline during the ECB press conference. On the other hand, cable to a large extent followed the EUR/USD decline even as this move was mainly ECB-driven. At the end of the day, sterling was slightly better bid . EUR/GBP closed the session at 0.8657. Cable finished the day at 1.2956.

Today's UK production and trade balance data will almost surely be ignored. The election outcome (hung Parliament) hammered sterling. Cable trades in the 1.27 area. EUR/GBP tries to sustain north of 0.88 and is nearing the 2017 top. A hung Parliament is probably the worst scenario for the UK going into the Brexit negotiations. It is highly uncertain how the negotiations will evolve. This high degree of uncertainty makes a BoE rate hike highly unlikely even as inflation might rise further due to the selloff of sterling. This is a negative context for sterling. At this stage, it is not sure whether the election outcome raises or reduces the probably of a hard Brexit. If, at some point, chances on a softer Brexit would rise, fortunes might improve for sterling. However, in a first reaction, we can't but join the sterling negative sentiment.

From a technical point of view, EUR/GBP broke above 0.8774 resistance. Next resistance comes in at 0.8854 (2017 top). A break beyond would open the way to the 0.90 area. A return below the 0.8655 correction low would be an indication that the pressure on sterling is easing.

EUR/GBP: nearing the 2017 top as sterling sells of after UK elections

Download entire Sunrise Market Commentary

Weekly
    •    Last Candlesticks pattern: Hammer
    •    Time of formation: 19 Sep 2016
    •    Trend bias: Down

Daily
    •    Last Candlesticks pattern: Doji
    •    Time of formation: 28 Mar 2017
    •    Trend bias: Near term up



EUR/JPY – 124.81




The single currency has remained confined within near term established range and further sideways trading is in store, although initial weakness to 122.56-63 support cannot be ruled out, reckon downside would be limited to 122.00 and 121.60-65 (38.2% Fibonacci retracement of 114.85-125.82) should attract renewed buying interest, bring another rise later, above 124.70-75 would bring rebound to 125.31, however, only break of previous chart resistance at 125.82 would confirm recent upmove has resumed and extend subsequent headway to 126.50-60, then 127.00-10 but overbought condition should limit upside and price should falter well below 128.00-10.

On the downside, whilst initial pullback to 123.00 and then 122.56-63 cannot be ruled out, reckon downside would be limited to 121.60-65 (38.2% Fibonacci retracement of 114.85-125.82) and bring another upmove later to aforesaid upside targets. Below indicated previous support at 120.60 would abort and signal a temporary top has been formed, bring retracement of recent entire rise to 120.30-35 (50% Fibonacci retracement) and then 120.00 but reckon downside would be limited to 119.40-50 and price should stay above indicated support at 118.92, bring rebound later. 

Recommendation: Buy at 121.60 for 124.60 with stop below 120.60.

On the weekly chart, as the single currency has continued meeting resistance below recent high of 125.82 and has retreated, retaining our view that further consolidation below this level would be seen, however, reckon downside would be limited to 122.00 and 121.50-60 should hold, bring another rise later, above 125.82 would extend the erratic rise from 109.49 low to 126.45-50, then towards 127.40-50 but reckon another previous resistance at 128.23 would limit upside and price should falter below 129.60-65 (50% Fibonacci retracement of 149.79-109.49) and price should falter below psychological resistance at 130.00, bring retreat later this month.

On the downside, although initial pullback to 123.00 and possibly 122.56-63 cannot be ruled out, reckon downside would be limited to 122.40-50 and renewed buying interest should emerge around 121.60-65 and bring another rise later. Only below support at 120.60 would defer and risk weakness to the Kijun-Sen (now at 120.34) and then 120.00 which is likely to hold on first testing. Looking ahead, euro needs to penetrate indicated support at118.92 to shift risk to the downside for further fall to 118.00, however, downside should be limited to previous resistance at 117.82 and bring rebound later. A weekly close below 117.82 would suggest first leg of rebound from 114.85 has ended, bring weakness to 117.00 but price should stay above 116.20-25, bring another rebound later.

Weekly
    •    Last Candlesticks pattern: Shooting doji
    •    Time of formation: 02 May 2016
    •    Trend bias: Up

Daily
    •    Last Candlesticks pattern: Bearish engulfing
    •    Time of formation: 5 May 2017
    •    Trend bias: Up



USD/CAD – 1.3512




Although the greenback has rebounded again after finding support at 1.3426 and further consolidation above support at 1.3387 would be seen, reckon upside would be limited to 1.3545-50 and price should falter below the Kijun-Sen (now at 1.3591), bring another decline later, below 1.3426 would bring retest of said support at 1.3387 but break there is needed to signal the fall from 13794 top has resumed and extend weakness to 1.3300-10,  however, break of support at 1.3262 is needed to retain bearishness and bring test of key level at 1.3223. Looking ahead, only a daily close below this support would signal recent entire rise from 1.2461 has ended instead, bring further fall to 1.3150-60 and possibly towards 1.3100 but support at 1.3056 should remain intact and price should stay above 1.3009.

On the upside, whilst initial recovery to 1.3530-40 cannot be ruled out, reckon the Kijun-Sen (now at 1.3591) would cap upside and bring another decline. Only a daily close above the Kijun-Sen would defer and suggest first leg of decline from 1.3794 has ended instead, bring a stronger rebound to 1.3630 and then 1.3670 but upside should be limited to 1.3700-10 and price should falter below said resistance at 1.3794, bring another decline later. 



Recommendation: Hold short entered at 1.3540 for 1.3340 with stop above 1.3640.


On the weekly chart, as the greenback recovered after finding support right at the Kijun-Sen, suggesting further consolidation above support at 1.3387 would be seen, however, reckon upside would be limited to 1.3545-50 and the upper Kumo (now at 1.3576) should hold, bring another decline later, below said support at 1.3387 would signal the fall from 1.3794 top is still in progress for retracement of recent rise to 1.3345-50, then towards 13262 support but break of key level at 1.3223 is needed to add credence to this view, bring further fall to 1.3140-50, then 1.3080-85, however, downside should be limited to 1.3000-10 and previous chart support at 1.2969 should remain intact.

On the upside, expect recovery to be limited to 1.3547 resistance (last week’s high) and bring another decline. Above the upper Kumo (now at 1.3576) would bring a stronger rebound towards resistance at 1.3670 but still reckon upside would be limited to 1.3700 and bring another decline later. Only a break of 1.3794 resistance would revive bullishness and signal recent erratic upmove from 1.2461 (2016 low) has resumed and extend further gain to 1.3835-40 (61.8% Fibonacci retracement of 1.4690-1.2461) and then 1.3900 but psychological resistance at 1.4000 should remain intact.

USD/CHF - 0.9693

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9687

Kijun-Sen level                    : 0.9669

Ichimoku cloud top                 : 0.9647

Ichimoku cloud bottom              : 0.9646

Original strategy :

Sell at 0.9720, Target: 0.9620, Stop: 0.9755

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 0.9720, Target: 0.9620, Stop: 0.9755

Position : -

Target :  -

Stop : -

Although dollar’s rebound from 0.9613 (this week’s low) suggests near term upside risk remains for gain towards resistance at 0.9720, as this move is viewed as retracement of recent decline, reckon upside would be limited too 0.9730-35 (61.8% Fibonacci retracement of 0.9808-0.9613) and bring retreat later, below 0.9645-50 would suggest an intra-day top is formed, bring weakness towards said support at 0.9613 but break there is needed to signal decline has resumed for fall to to 0.9600-05 (50% projection of 1.0100-0.9692 measuring from 0.9808) later.

In view of this, we are looking to sell dollar on recovery as resistance at 0.9720 should limit upside. Above 0.9740 would abort and signal a temporary low is formed instead, bring a stronger rebound to 0.9761 resistance but price should falter below resistance at 0.9808.

GBP/USD - 1.2700

Most recent candlesticks pattern   : N/A

Trend                                 : Near term down

Tenkan-Sen level                 : 1.2735

Kijun-Sen level                    : 1.2810

Ichimoku cloud top              : 1.2944

Ichimoku cloud bottom        : 1.2921

New strategy  :

Sell at 1.2760, Target: 1.2630, Stop: 1.2795

Position : -

Target :  -

Stop : -

Cable has tumbled on UK election result, the breach of indicated previous support at 1.2769, adding credence to our view that top has been formed at 1.3048 earlier and bearishness remains for the decline from there to bring retracement of early upmove to 1.2616 (previous resistance turned support), break there would extend weakness to 1.2575-80 but reckon near term oversold condition would limit downside to 1.2550, bring recovery later.

In view of this, would not chase this fall here and would be prudent to sell on recovery as 1.2750-60 should limit upside. Only above 1.2800-05 would defer and risk a stronger rebound to 1.2830-35 but price should falter below 1.2870-75 and bring another decline later.

EUR/USD - 1.1193

Most recent candlesticks pattern   : N/A

Trend                      : Up

Tenkan-Sen level              : 1.1198

Kijun-Sen level                  : 1.1224

Ichimoku cloud top             : 1.1251

Ichimoku cloud bottom      : 1.1244

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Euro’s decline after faltering below indicated strong resistance at 1.1285 suggests top has possibly been formed there and further consolidation would be seen with downside bias for weakness to indicated support 1.1164, however, break there is needed to add credence to this view, bring further subsequent fall to 1.1145-50 and then towards 1.1120 but support at 1.1109 should hold from here.

In view of this, would not chase this fall here and would be prudent to stand aside in the meantime. Above 1.1235-40 would bring another bounce to 1.1270 but only break of said resistance at 1.1285 would revive bullishness and confirm recent upmove has resumed and extend further gain to previous chart resistance at 1.1300, break there would encourage for headway to 1.1340-45 and later towards chart point at 1.1366.

USD/JPY - 110.26

Most recent candlesticks pattern   : N/A

Trend                      : Down

Tenkan-Sen level              : 110.09

Kijun-Sen level                  : 109.89

Ichimoku cloud top             : 109.69

Ichimoku cloud bottom      : 109.65

Original strategy  :

Sold at 110.20, Target: 109.20, Stop: 110.55

Position :  - Short at 110.20

Target :  - 109.20

Stop : - 110.55

New strategy  :

Hold short entered at at 110.20, Target: 109.20, Stop: 110.55

Position :  - Short at 110.20

Target :  - 109.20

Stop : - 110.55

Although the greenback has rebounded after finding renewed buying interest at 109.38 yesterday, as this move from 109.11 is viewed as retracement of recent decline, reckon upside would be limited and 110.50 should hold, bring retreat later, below said support at 109.38 would signal an intra-day top is formed, bring another fall towards this week’s low at 109.11 which is likely to hold on first testing.

In view of this, we are holding on to our short position entered at 110.20. Above 110.50 would defer and suggest low is formed instead, bring a stronger rebound to 110.60 but break of resistance at 110.73 is needed to add credence to this view.