Talking Points

- UK Prime Minister Theresa May agreed a deal Monday with Northern Ireland’s Democratic Unionist Party that should give her Government a Parliamentary majority.

- That, in turn, means Parliament is likely to pass later this week the Brexit legislation detailed in last week’s Queen’s Speech.

- The British Pound, however, failed to respond – suggesting a “soft” Brexit is now priced in.

UK Prime Minister Theresa May and the leader of Northern Ireland’s socially-conservative Democratic Unionist Party have agreed a so-called “confidence and supply” deal that should give her a Parliamentary majority to pass the Brexit legislation outlined in last week’s Queen’s Speech detailing the Government’s legislative program.

Although weaker than a full coalition agreement, the deal should ensure that the legislation is passed at the end at the end of the Queen’s Speech debate that takes place in the House of Commons this week, ending on Thursday.

The Government statement detailing the agreement said that “the DUP agrees to support the Government on all motions of confidence; and on the Queen’s Speech; the Budget; finance bills; money bills, supply and appropriate legislation and estimates.”

“In line with the parties’ shared priorities for negotiating a successful exit from the European Union and protecting the country in the light of recent terrorist attacks, the DUP also agrees to support the Government on legislation pertaining to the United Kingdom’s exit from the European Union; and legislation pertaining to national security,” it added.

Support on other matters will be agreed on a case-by case basis and the DUP has agreed to support the Government in votes in the UK Parliament on this basis.

For May, the deal was crucial before the end of the debate on the Queen’s Speech as the Government’s program, mostly related to Brexit, would have been defeated. No time has yet been set for the vote on the Queen’s Speech but a House of Commons spokeswoman told Daily FX that six days have been set aside for the debate, taking us up to Thursday.“We expect the votes to take place on Thursday. However, as yet, details of when any votes will take place are yet to be confirmed,” she said. The legislation will then have to be passed by the House of Lords.

This is all crucial for the Pound, which has been buffeted in recent weeks by the political twists and turns in the UK. The DUP deal adds an element of stability to the political outlook and also increases the chances of a “soft” – or mutually agreed – Brexit pact between the UK and the EU. However, the Pound barely moved on the deal, suggesting that a soft Brexit is now fully priced in to the markets.

Chart: GBP/USD Five-Minute Timeframe (June 26, 2017)

Chart by IG

This implies that the Pound could be hurt in future weeks by any bumps in the road to Brexit, of which there are bound to be many.

Markets

Upcoming UK/EU Event Risk