The pound surged against the dollar on Tuesday to its highest level since last December after the Prime Minister, Theresa May, said she wanted a general election on 8 June.
When Ms May announced she wanted a new national poll, at around 11.05am, the pound instantly jumped, climbing to $1.2749 by mid-afternoon, up 1.42 per cent on the day and the highest since last 13 December.
Against the euro the pound rose to €1.912, up 0.9 per cent on the day.
A poll for The Independent on Saturday indicated a 21 point lead for the Conservatives over Labour, the biggest gap since 1983, with political analysts forecasting that Ms May’s party would win a majority of up to 100 seats.
The shift prompted a rare comment on the currency from the Chancellor, Philip Hammond, who said it demonstrated “the confidence that the markets have in the future for this country under a Tory government with a new mandate”.
“Everything points to the Tories being elected with a substantially increased majority which will give the Government a firm mandate and put it on steadier, more solid ground as it begins the difficult, complex work of negotiating Brexit. This can only reduce uncertainty and the potential for hiccups over the next couple of years,” said Paul Mumford, a fund manager at Cavendish Asset Management.
“Markets can get a case of the jitters in the run up to elections, but this one may be different seeing as it comes in the wake of the Brexit vote, and the polls suggest the incumbent government is likely to remain in power and gain more seats,” said Laith Khalaf, an analyst at Hargreaves Lansdown.
“All else equal [this] should lower the risk of a very disruptive Brexit as the government should be able to plot a less confrontational exit from the European Union,” said Mike Amey of Pimco.
UK 10-year bond yields dipped below 1 per cent before the announcement, before recovering to 1.041 per cent after the statement.
Luke Bartholomew, an investment manager from Aberdeen Asset Management, said it would take investors time to digest the news.
“A big factor for them is whether the election will make a softer stance on the Brexit negotiations more likely,” he said.
“The election should hand Theresa May a much bigger mandate to stand up to the harder line, anti-EU backbenchers which currently hold a disproportionate sway over her party’s stance on Brexit. That would be welcomed by financial markets.”
Separately, the International Monetary Fund on Tuesday upgraded its 2017 UK growth forecast to 2 per cent, up from 1.5 per cent in January.
That would make the UK the second fastest growing economy this year after the US. Last October the Fund had forecast 2017 UK growth of just 1.1 per cent.
However, the IMF still sees UK GDP growth in 2018 slipping back to 1.5 per cent.