Mrs May’s statement was a major driver of volatility today after the pound inititally dropped to $1.25 against the US dollar upon Downing Street’s statement that it would call a press conference.
But it recovered to $1.2556 against the US dollar and staved off its losses against the euro shortly after her speech which confirmed the Conservative Party wants to legitimise her position through a public vote.
The pound’s surge today off the news about a snap general election could be short-lived though, an analyst has warned.
ING Bank analyst Viraj Patel, who is based in London, has told his clients that sterling could be in the grip of a “short-squeeze” and that it’s current strength is not necessarily justified.
Today the currency markets appear to be reacting positively to the news that Prime Minister Theresa May has called for a snap general election on June 8 as it appears that Mrs May is attempting to consolidated the Conservatives’ dominant position in Westminster with an increased majority to ensure her Brexit tactics are given a smooth ride.
A “short-squeeze” occurs when a stock that has been heavily suppressed all of a sudden gets unexpected positive news – such as a snap election – which then attracts a massive amount of new buyers into the market, which pushes up the price.
The effect then snowballs with the sharp rise attracting even more investors.
The US Commodity Futures Trading Commission (CFTC) has recorded near-record negative bets on sterling, according to reports, indicating that the pound had only one way to go, which was upwards.
Mr Patel said: “Today’s news has been a good enough reason for another squeeze in short GBP positions – in our opinion the most credible explanation for GBP’s post-announcement rally.”
If Mr Patel’s predictions are proved correct then sterling looks set to slide in the near future, which could be compounded with the pound probably facing a volatile future up to the general election in early June.
Currently – at 3.55pm – the pound against the euro stands at 1.1928, up slightly but some way off the high of the past 12 months of 1.3218.
— Tom Hearden (@followtheh) April 18, 2017
Theresa May’s announcement that there will be a general election on the 8th June, we have seen the pound rise against the euro with the currency pair hitting its highest level since 24th February
At around midday it then soared to $1.26 against the US dollar and €1.18 against the Euro.
It is now up 1 per cent on the day at $1.2692 hitting its highest level since February 2.
The Prime Minister did not hold back with her rhetoric taking aim at the SNP, Labour, Liberal Democrats and the House of Lords for the divides at Westminster as she announced her plan to an unsuspecting public.
GBP/USD down about 0.55% from just before the announcement of May’s statement. I am limbering up for a classic 2016 sterling spectacular. pic.twitter.com/dVTq3fnFge
— Mike Bird (@Birdyword) April 18, 2017
And she said she planned to call the election to prevent “political game playing.”
The last time a snap election was called with such short notice was on 18th September 1974 they were then held on the 10th of October.
Mrs May has to get permission from the UK Parliament under the rule changes of the 2011 Fixed Term Parliaments Act.
Downing Street’s announcement that Mrs May was to make a statement initially spooked the markets and the pound dropped from $1.26 to $1.25.
However it then bounced back against both the euro and the dollar as the concept of what a General Election could mean was factored in.
Investor sentiment has been wary because of the French elections which are causing uncertainty for the Euro.
Now it appears that if Mrs May – who was today hailed for her strong, commanding performance in Downing Street – wins an election then it could potentially spark the beginning of an upward trend.
It has been confirmed that the Labour party will back the general election going ahead as claims Jeremy Corbyn will use his whips to encourage a parliamentary vote.
— Joe Weisenthal (@TheStalwart) April 18, 2017
Arron Morris, Senior Currency Broker at Foremost Currency Group said: “Following Theresa May’s announcement that there will be a general election on the 8th June, we have seen the pound rise against the euro with the currency pair hitting its highest level since 24th February.
“With official Brexit talks due to start at the end of April and the first round of the French elections set for Sunday we could see some heightened volatility for the currency pair in the coming weeks, so this morning’s rise is certainly welcome news for euro buyers.”
The announcement also affected UK bond yields with 10-year at 1.02 percent, after earlier falling below 1 percent for the first time since October.
Meanwhile Shilen Shah, Bond Strategist at Investec Wealth & Investment, said: “After much speculation this morning, the Prime Minister has confirmed that she is calling an early general election to fully implement the Brexit process.
“Following some initial weakness ahead of the statement, Sterling has stabilised and is slightly up on the day. Gilts yields have also been stable, with the 10-year yield hitting a session low of 1.01%.
“Overall, today’s announcement suggests that PM wants full control of the Brexit process without any interference from the opposition.”
Meanwhile Peter Ashton, Managing Director of Eiger FX says Mrs May could well have pulled a winning ticket and that her announcement today may galvanise the pound – esepcially in light of positive jobs data.
He said: “The political curveball delivered by the Prime Minister that a General Election will be held on 8 June provided an immediate boost to the Pound.
“The markets were quick to price in greater economic and policy stability under what they expect will be a significant majority given the weakness of the opposition.
“There is still huge uncertainty surrounding the implementation of Brexit but a strong majority party will help to provide a degree of stability while we negotiate the choppy waters ahead.
“After last week’s strong jobs data this is yet another positive development for Sterling.”
Paul Mumford of Cavendish Asset Management said: “From a markets point of a view a snap election is welcome news – at least in the longer term once the initial reaction has subsided.
“Even without the proposed boundary changes, 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, so it’s a sensible move.”
This is a developing story check back for the latest updates…