* Graphic: sterling and gilt yields bit.ly/2dgAXn1
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv
By Patrick Graham
LONDON, June 13 (Reuters) - Sterling recovered around 0.2 percent on Monday of its almost 3 percent slide since the first hint of UK election results on Thursday night, helped by hopes domestic politics may be inching towards a “softer” and less economically damaging Brexit.
Inflation numbers (0830 GMT) are the main set piece after two traumatic days for the pound which saw Prime Minister Theresa May’s majority collapse and investors worry that political turmoil would further weaken an already slowing economy.
By 0742 GMT, the pound had recovered 0.2 percent from Monday’s closing levels in New York to trade at $1.2693, just over half a cent above Friday’s intraday lows.
Against the euro, it was also 0.2 percent stronger at 88.33 pence, having hit its weakest in seven months on Monday.
“Brexit talks will of course dominate the market mood and this morning, amid talk of a cross-party plot to ensure the UK negotiates for a ‘softer’ Brexit, there’s an excuse for some short-covering,” said Societe Generale analyst Kit Juckes.
“That’s a blip on the road to euro-sterling trading comfortably above 90 pence.”
Short covering refers to the closing of existing bets against the currency, typically purely to lock in some gains on such positions after the currency has fallen.
Prime Minister Theresa May meets the leader of a small Northern Irish Protestant party (DUP) on Tuesday in an attempt to save her premiership and avoid a second election that would thrust Brexit negotiations, due to start this month, into turmoil.
With some calling for her resignation and others describing her as a dead man walking after last week’s result, May won some time when she performed well on Monday in front of Conservative lawmakers who said they would help her remain in power for now.
But crucial for banks and financial markets are the blow the election has delivered to May’s plan for a “hard” Brexit that prioritised immigration controls over membership of the EU’s single market.
There is no clear evidence of a move on that front among Conservative leaders as yet, although many of the party’s more moderate supporters in the media have argued for it.
What is clear is that even should May gain the support of the DUP for confidence votes and budgets, she will struggle to legislate normally at a time when the economy badly needs fiscal and policy support.
“With Theresa May holding coalition talks and fighting to remain prime minister, but new elections before the end of Brexit negotiations a very real possibility, the market focus remains firmly on politics,” Unicredit analysts said in a morning note.
“We expect the pound to slide further over the coming months, with upside risks to our year-end forecast of 89 pence per euro.”