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Pound leaps as snap election points to softer Brexit

Theresa May’s surprise general election announcement sent sterling almost 1 per cent higher on Tuesday, breaking a key gauge of momentum for the first time since the EU referendum, as investors awoke to the prospect of the prime minister neutralising hardline Eurosceptics in her party to deliver a soft Brexit.

The pound was trading at a 10-week high of about $1.2671, more than reversing a half per cent fall that was triggered when Downing Street announced the prime minister’s intention to make an unscheduled announcement on Tuesday morning.

Against the euro, the pound strengthened by 0.5 per cent, with £0.8427 needed to buy a a unit of the shared currency. It is the pound’s highest level since late February.

David Owen, chief European financial economist at Jefferies, said Mrs May’s intention to seek a snap election was reassuring to the markets because it “increases the probability of a softer Brexit”.

“Not only does this neutralise Labour and the SNP, but it means she can negotiate a Brexit deal along the lines of what she wishes for, rather than having to appease the hardliners in her own party,” he said. “She is now in a position to neutralise them as a threat.”

1. Theresa May’s “citizens of nowhere” speech leads to start of sterling sell-off

2. Philip Hammond and David Davis meet bank chiefs at the Shard in a “reassurance exercise”

3. May’s Sky TV interview leaves markets unimpressed; pound falls again

4. Sterling retreats after Downing Street briefings on May’s upcoming speech on Brexit

5. May’s Lancaster House Brexit speech contributes to pound’s 3 per cent bounce

6. Bank of England meeting prompts sterling fall

7. Article 50 is triggered, starting a two-year exit negotiation process

8. May seeks early election to take UK through Brexit

The strength of the pound unnerved UK stock markets, which have been energised by sterling’s slide since the Brexit vote as companies with earnings in dollars benefit.

The FTSE 100, London’s main equities benchmark, was 1.4 per cent weaker at 7,222.25 in early afternoon trading. The FTSE 250 fell 0.8 per cent to 19,360.47. Meanwhile, yields on 10-year UK government debt dipped to 1 per cent before jumping back up again to 1.04 per cent, near pre-announcement levels. Yields move inversely to prices.

Mrs May has been facing the challenge of extracting Britain from the EU while under pressure from her party’s Eurosceptics to achieve as distant a future relationship as possible — or a so-called hard Brexit.

With a slim parliamentary majority of just 17, Tory rightwingers have had significant power to influence the outcome of negotiations that were officially triggered at the end of March. The Conservatives have been riding high in the polls for months, and the prime minister is now seeking to translate that into a sufficiently substantial majority to drown out the 20 to 30 most committed hardliners on the backbenches.

Luke Bartholomew, an investment manager at Aberdeen Asset Management, said Mrs May “smelled an opportunity to consolidate her mandate ahead of the Brexit negotiations”.

“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.”

Stephen Gallo, European head of forex strategy at Bank of Montreal, said: “A snap UK general election is positive for the pound. Yes, the election adds a layer of uncertainty, but from what I can see, the Conservative party stands to pick up a decent amount of seats.”

Despite the initial sanguine reaction, investors have long regarded the prospect of an early election as unsettling. The prospect of uncertainty in the run-up to the proposed June 8 poll and, potentially, beyond left some analysts feeling unnerved.

Richard Hunter, head of research at stockbroker Wilson King, pointed to June 8 election as “a fresh addition to the risk calendar,” and said it was likely to put the break on further gains to the UK equity market, at least for the time being.

“The worst-case scenario for UK stocks, at least in the immediate term, is that elements from across the current opposition parties unite to use the election to call for a new referendum. That would add to the existing uncertainty that the general election creates, since it would be likely to lift sterling, hurting the benefits to the London stock markets of a weaker pound.”