Sterling builds on gains as British PM calls July election

LONDON (Reuters) -Sterling edged higher while UK stock futures fell on Wednesday after Prime Minister Rishi Sunak called a parliamentary election for July 4, which analysts said removed a degree of political uncertainty from the picture for traders.

The British currency was up 0.3% on the day at $1.2744, gaining modestly from levels before Sunak started speaking outside his Downing Street residence.

Futures on the FTSE 100 stock index fell 0.7%. They had traded down 0.6% earlier in the day.

The blue-chip index earlier closed down 0.6%, while UK gilt yields rose sharply after British data showed inflation had slowed more slowly than expected in April, undermining the case for the Bank of England to cut interest rates as early as June.

"Currencies like political certainty and the pound is no exception. An election generates unknown variables and moving parts," Neil Jones, senior FX sales to financial institutions at TJM Europe, said.

"There is very heavy focus on the BoE and the dollar right now and that will remain key, we've just added another layer of significance into the mix for the pound," he said.

Sterling options volatility, a measure of trader demand for protection in the case of large price swings in the future, rose for contracts that cover July 4.

Two-month options volatility rose by the most in one day since mid-April to 6.08%.

A UK election by law must be held by Jan. 28, 2025, and speculation of an early election had been building throughout Wednesday.

The opposition Labour Party has held a lead over the Conservatives of around 20 points in opinion polls since late 2021. Sunak took office in October 2022.

A UK election has been widely anticipated this year, and was not expected to have any immediate bearing on the outlook for the economy or Britain's debt trajectory.

Still, investors and analysts say that with an election date announced, markets would start to pay more attention to policy proposals, especially from the Labour Party as it leads in the opinion polls.

"Markets really 7are just looking for stability and certainty from any government coming in, and right now it looks like we are going to get a relatively moderate Labour government that is going to pursue relatively market friendly borrowing policies and markets are looking at it and going 'thank goodness'," said Nicholas Rees, an FX analyst at Monex Europe.

(Reporting by London markets team; writing by Amanda Cooper; Editing by Dhara Ranasinghe and Bernadette Baum)