LONDON - The optics of sterling hitting its highest since 2016's Brexit referendum after a surprise UK election announcement is hard to ignore - and may suggest hope at margin for a healing of Brexit-related economic damage.

What Washington's Peterson Institute for International Economics described this week as a "self-inflicted wound", Britain's messy exit from the European Union has dogged inward investment, the pound and British markets for almost a decade.

That Brexit hurt the economy now seems uncontroversial to most observers. Only last month, the Bank of England's (BoE) next deputy governor for monetary policy Clare Lombardelli said the "evidence suggests that Brexit has had a negative economic impact through investment and trade."

While parallel shocks from the pandemic and Ukraine-related energy and inflation spikes make the precise size of the negative hit hard to measure, Lombardelli said analysis showed Brexit had led to a large and long-lasting increase in uncertainty and reduced investment, output and productivity.

Experts aside, the public seems to have figured that out already.

Opinion polls now consistently show those who think it was wrong to leave the EU some 20 points ahead of those who still think it was right. Some show big majorities even in favour of re-joining.

Whether a likely change of government shifts the dial significantly on the issue is still far from clear, but relations between Britain and the European Union could hardly get much worse than they've been for the past eight years.

This month's surprise announcement of a July 4 election left the pound and broader British asset prices largely unruffled, with betting markets now putting more than a 90% chance the opposition Labour Party returns to power for the first time in 14 years, with opinion poll leads consistently above 20 points.

As ever, a blizzard of other factors influence sterling's recent rise - not least scaled-back expectations for a summer interest rate cut from the BoE.

But mounting pound strength into a change of government - which includes its rise against the euro to levels not seen since before the government budget farce of late 2022 - looks more than just a cyclical twist or turn.

The BoE's trade-weighted sterling index hit its strongest this week since the 2016 referendum that eventually took Britain out of EU in 2020, 47 years after it joined the common market.

Although still some 5% below pre-referendum levels, the pound has rebounded well over 10% from the nadir of its 2022 budget-related collapse and is up about 2.5% this year alone.

But the return to 2016 levels is a notable milestone. And what's more, long-unloved, under-owned and heavily-discounted British stocks have finally joined peers at record highs this month despite the pound's rise.

LABOUR'S SIDESTEP

Although Labour has been keen to avoid what it sees as a divisive Brexit issue on the hustings and ruled out any plans to return to the EU's single market or customs union, it has pledged to renegotiate the post-Brexit agreement with the Brussels trading bloc.

Last September, Labour leader and likely next Prime Minister Keir Starmer promised to improve the trading relationship with the EU in 2025 if his party won the election.

Starmer said he would seek closer EU ties when the partnership comes up for review next year, aiming to improve the 2021 Trade and Cooperation Agreement (TCA) struck by former PM Boris Johnson in areas such as security, innovation and research.

That sounds marginal and far from any suggestion of a major Brexit reversal.

But the sort of large Labour parliamentary majority currently projected may give a new government considerable latitude to reengage with Brussels on a whole host of issues should it so wish.

For markets monitoring the situation, publication of election manifestos in the coming weeks now marks the next juncture, even if hopes for anything concrete on Brexit in these is low and with polling indicating the issue is low on the list of voter priorities right now.

AXA Investment Managers Chief Economist Gilles Moec doubts either party will want to deal with Brexit head on before the vote, even though he thinks it is the "elephant in the room" when it comes to the overall economic picture.

And JPMorgan's Allan Monks fears the absence of something more pointed in its manifesto may mean Labour will not have a mandate to act more forcefully over the years ahead.

"Governments often deviate from manifesto pledges, but given the controversy of this issue that appears very unlikely here without a public vote," Monks said. "The TCA is up for a review... but the EU has indicated that this is about resolving teething problems rather than an opportunity to open up the agreement for meaningful changes."

Low expectations shaping room for a surprise? Or perhaps there are simply other fish to fry?

Brexit hopes or not, the pound seems to be making up its own mind either way.

The opinions expressed here are those of the author, a columnist for Reuters.

(Editing by Jamie Freed)