Sterling rallied in early afternoon trading on Tuesday, recovering from initial losses after Theresa May announced a snap election, as investors began to hope that the June vote would give the UK prime minister a more decisive mandate as Brexit talks get into full swing.
Sterling fell from 0.845p against the euro to 0.851p immediately after the leader of the UK’s Conservative Party made the announcement outside No 10 Downing Street at around 11am, before recovering the ground again within minutes. However, it had rallied by 0.5 per cent to 0.842p by early afternoon.
The reaction was similar in sterling trading against the US dollar, with the UK currency managing to turn initial losses following Ms May’s statement to a 0.8 per cent gain to $1.2671.
However, the FTSE 100, which is dominated by export-oriented oil and pharmaceutical groups, extended its losses to fall by as much as 1.6 per cent to 7,210 as investors digested the news, while the Iseq index in Dublin dipped by 0.3 per cent to 6,674.
"The Conservatives are currently around 20 percentage points ahead of Labour in the opinion polls, so the election would very likely see an increased Tory majority, in turn increasing the likelihood of Brexit, according to Mrs May's plans," said Chris Hare, an economist with Investec in London.
Less confusion
“Although leaving the [European] single market is priced in, one possible upside for sterling markets is the notion of Brexit taking place with less opposition, less confusion. But clearly it is early days, and the looming vote could well cause market volatility in the weeks to come.”
Alan Clarke, an economist at Scotiabank, said: “The pound seems to be a little bit firmer on the news. I guess if it leads to a bit more certainty and you have a bigger majority for the Conservatives it means a little more certainty.”
News of the UK election added to volatility of European markets on Tuesday as investors also monitor the standoff over North Korea’s nuclear weapons programme and the first-round vote this weekend in the French presidential election.
