LONDON, May 22 (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.