The pound bounced back sharply against the dollar on Tuesday morning after the Prime Minister, Theresa May, said she wanted a general election on 8 June.
The pound had slumped around 0.5 per cent to $1.2527 after it was announced at 9.58am there would be a statement outside Downing Street.
But when Ms May announced she wanted a new national poll in six weeks' time, at around 11.05am, the pound bounced back, reaching $1.2646 by noon, up around 0.7 per cent on the day and the highest since last December.
A poll for The Independent on Saturday indicated a 21 point lead for the Conservatives over Labour, the biggest gap since 1983.
Pound rises
Against the euro the pound fell from €1.1822 to €1.1756 before snapping back after Ms May's announcement and hitting €1.861 by midday, up 0.47 per cent on the day.
"The initial sell off in the pound was likely a bit of nervousness that Theresa May could be about to resign, once that fear was put to bed we have seen the pound surge to fresh highs. Pound traders obviously see May as a stabilising force," said Kathleen Brooks, research director of City Index Direct.
"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.
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."
