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Markets need ‘concrete evidence’ to price in softer Brexit

  • The lack of strong evidence of a softer Brexit has kept financial markets calm despite the outcome of the U.K. general election.
  • GBP slightly higher on Tuesday recovering from losses in the aftermath of the election.
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The lack of strong evidence of a softer Brexit has kept financial markets calm despite the outcome of the U.K. general election.

The FTSE 100 was hovering around the flatline on Tuesday following reports that the U.K. government was holding secret talks with the Labour party ahead of Brexit negotiations. The conservative government lost its parliamentary majority after a snap election last week, which has reduced its credibility to negotiate with the EU.

"For now it's just speculation, we will need to see concrete evidence that the U.K.'s stance has softened, either from a speech by (PM) May or another prominent minister close to the negotiations," Kallum Pickering, senior U.K. economist at Berenberg, told CNBC on Tuesday.

Michael Gove, the new environment minister, said Tuesday that the government is ready to take a softer Brexit stance to ensure that a deal with the EU passes through parliament. He told the BBC Radio 4 Today's program that the government should "proceed with the maximum possible consensus" and "make sure that Remainers' concerns are part of our conversation".

However, Downing Street denied its Brexit approach would change.

John Hardy, head of forex strategy at Saxo Bank, told CNBC via email that so far market reaction to Brexit has been random.

"I think a lot of this is randomness – the "softer Brexit" idea is just a narrative from the U.K. – an interesting one, but hard to hang our hats on as things are in flux. Just as important is the EU perspective, and there, we have to consider the strong Macron victory and a couple of themes from that," he said.

"Second, actual EU moves are isolating the U.K. – like today's measures aiming to have euro-denominated derivatives cleared only by EU-based banks – therefore requiring massive reshoring away from London," he added.

The EU has also recently boosted an inner debate on its future without the EU and has put forward plans to create a European defense union – something that the U.K. opposed in the past.

Despite the muted market reaction, Hardy noted that it's surprising how sterling is "actually hanging in there as well as it has."

Sterling was higher at about lunchtime on Tuesday at $1.2736, up by 0.6 percent on the day, after initially sinking in the aftermath of the General Election.

Jane Foley, head of forex at Rabobank, said that the idea of a softer Brexit has been preventing sterling from falling further on the back of the news of a hung parliament.

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