Sterling bounces back near six-month highs against the US dollar as election fever still grips currency markets

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UK Pound Rises Above Two Dollars
Sterling has regained some of its value since May's announcement (Source: Getty)

Sterling sustained its high levels on Thursday after a brief pause as traders continue to take in the prospect of an early election.

Prime Minister Theresa May’s shock decision to announce a vote on 8 June has seen sterling rise to its highest level since early October, shortly before a “flash crash” saw it fall to 31-year lows against the US dollar.

Sterling hit highs of $1.2837 against the dollar on Thursday morning, rebounding after weakening to below $1.28 yesterday evening. It had gained around a third of one per cent from midnight at the time of writing.

Read more: Sterling stabilises as FTSE 100 sees 2017 gains wiped out

MPs yesterday backed the government's bill allowing an early election, removing the last hurdle to the vote.

Investors apparently welcomed the prospect of an increased majority for May, with the pound rising dramatically. It increased by more than three per cent from its pre-announcement lows before paring some of its gains.

A stronger Conservative majority would likely give May more power to ignore critics from the right of her party. Investors have broadly taken this to mean the prospects for a “hard Brexit” are diminished.

However, some economists see scope for the pound to retreat from recent gains if May does not back away from some of the "harder" rhetoric on negotiations with the EU.

Read more: A June election is go! MPs back May's plans

David Meier, an economist at Julius Baer, said: “We do not believe that Prime Minister May is willing to soften her Brexit stance before negotiations with the EU commence – from the perspective of political capital building, this makes little sense.”

With a General Election campaign now underway, the currency could face further volatility over the next seven weeks.

Lukman Otunuga, research analyst at FXTM, said: “With political risks and uncertainty revolving around Brexit remaining a dominant theme when dealing with sterling, the bullish rally could face some headwinds down the road.”

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