Green light for sterling
Out of the blue
Yesterday morning investors probably thought they had learned to handle every geopolitical googly the world could throw at them. Kim, Xi, Trump, Putin, Assad, Erdogan, Le Pen and Zuma had all failed to unsettle them. Then along came Theresa May with an unscheduled general election and everyone went potty.
When Downing Street announced on Tuesday morning that the prime minister would make a statement outside her front door the first thought of investors was to sell the pound. They had no idea what she was about to say but the short notice - little more than an hour - led them to believe it was something urgent and possibly unpleasant. So, to manage expectations before Mrs May opened her mouth, Number Ten let it be known that she was about to call an election. The pound steadied and began to recover.
As the prime minister set out her plan, investors fell in with the idea that a June election would give Mrs May 44% of the vote, leaving the Labour, Liberal Democrat and UK Independence parties with 44% to share between themselves. That would mean a crushing Commons majority and a clear mandate for the Prime Minister to pursue whatever texture of Brexit she fancies.
Bears feeling blue
On Friday the weekly report from the US Commodity Futures Trading Commission confirmed that there were still sizable long-dollar/short-pound speculative positions in the futures market. It is fair to assume that positions in the cash market were considerably bigger. Mrs May's announcement severely tested the holders of those positions.
There are several reasons why investors might have seen an early election and a big Conservative majority as positive for the pound. Not only would it make it easier for the prime minister to face up to the opposition in parliament, it would also make her less vulnerable to the extreme Brexiteers in her own party.
So as they piled into sterling they put the bears to flight. Tuesday's rally had much to do with panic buying to cover short positions. And what a rally: two and a half US cents, two and a quarter yen, one and a half euro cents and an average gain of 1.8%.
Into the blue?
The election announcement forced a rapid reappraisal of the UK political scene and a good deal of guesswork about the prime minister's real thoughts about hard vs soft Brexits. It was clearly a positive result for the pound on Tuesday but sterling's future course is less easy to divine.
Against the euro sterling is in a resistance zone that has blocked its way half a dozen times since last summer. Against the US and Australian dollars it is in similar, though not quite so clear-cut, situations.
The question, then, is whether the election will be the game-changer that some analysts make it out to be. If yes, the pound may be able to break into higher levels. But probably not today.