In a week very light on data, Theresa May’s call for a snap election on June 8 was the main event. A corresponding motion has already been passed in Parliament.

Unless there is a big shift in the opinion polls, the Conservative government appears on track to substantially increase its current wafer-thin majority. Although we continue to see a “hard Brexit” as the most likely end-game, a softer or longer transition to that destination would be a positive development for growth in coming two years.

While much remains uncertain, the scenario described above should be positive for business confidence. Already the pound has appreciated roughly 2% since the snap election announcement.

Coming after some earlier appreciation over the past month, GBPUSD has now broken out of its recent range to hit its highest levels since last October. While this will adversely affect business profits and exports, this negative impact could easily be outweighed by more positive sentiment.

The currency move is also a welcome development for the consumer—which is at the heart of the expected slowing in UK growth this year. To be clear, the currency is still down by around 15% from its 2015 peak. But relative to our baseline forecast, its rise over the past month, if sustained, would be sufficient to lower the one to two-year-ahead inflation profile by around 0.2%-pt (we forecast 3% average CPI inflation over the next year).

Election clears the way for a longer and smoother Brexit transition

Reduces risk of a “cliff-edge” in 2019, and hence is a modest positive for the medium-term outlook

Back-end GBP vol likely to resist electoral lift:

GBP vols bounced this week after PM May called a snap general election.

1M ATMs are up 0.5 pts. on the week, while 2M expiries that cover the June 8th election date are 0.7 pts. higher to account for the increased event weight.

We have no quarrel with this re-pricing: an information shock that delivers a 2.5% intra-day range in spot with risks of follow-through in coming days via forced liquidation of one-way short spec positions (basis IMMs) can and should push up gamma vols.

The election event itself is not particularly binary given the extent of the Conservative polling lead, hence day-weight should be significantly smaller than for the Brexit referendum or the French elections.

Nonetheless, GBP gamma is a worthy buy, especially in the likes of GBPCAD, GBPAUD and GBPNZD that all look cheap on our screens, purely because of the likely whipsaw in the pound going forward as the market turns its attention to assessing the full implications of the change in British political landscape once the French vote is out of the way.

Long 1-y ear GBPUSD 1.42 put v s. 1.6175 call (25D risk reversal).