The pound charged higher on Tuesday after Prime Minister Theresa May called an early election, a gambit aimed at cementing her position ahead of tricky Brexit negotiations with the European Union.
The British currency dropped ahead of May’s surprise announcement, but it reversed course and entered positive territory as she spoke. The pound continued to strengthen as investors digested the news, surging 1.6% to surpass $1.27, its highest level against the dollar in 2017.
“The pound’s response may simply have reflected the elimination of one additional source of Brexit-related uncertainty,” said analysts at Capital Economics, who added that the currency is likely to rally further this year.
The pound has lost 15% of its value since the Brexit referendum in June 2016, when it was trading at $1.50.
London’s FTSE 100 index, meanwhile, was down 2.3% on Tuesday — a much sharper decline than other stock markets in Europe. Many of the multinationals that make up the index do business in foreign currencies and those earnings are worth less when the pound rises.
May became prime minster following the resignation of David Cameron last summer after he failed to persuade British voters to back continued membership of the EU. An election gives May the chance to cement her political position and win support for her vision of Brexit.
Public support for May’s political opponents — the Labour Party and the Liberal Democrats — remains at very low levels in the wake of the June referendum on Britain’s membership in the EU.
The election will be held June 8.