The pound has hit its highest level since its crash after the Brexit referendum a decade ago, as investors welcomed the UK’s push for closer ties with Europe.
Data released by the Bank of England on Thursday showed that the pound reached its strongest level against a basket of other currencies since ۲۳ June ۲۰۱۶ – the day of the EU vote – on Wednesday.
This follows the drop in the value of the US dollar after the midterm elections, but also reflects the pound’s recent strength against other currencies such as the euro and the yen.
Susannah Streeter, the chief investment strategist at Wealth Club, said signs that the UK was trying to build better relations with Europe had helped to bolster the pound.
“There is a sense that the UK is beginning to be viewed in a more favourable light by international investors, with its reputation for stability starting to regain some lustre. Political and economic difficulties across the Channel, particularly in France, are also providing a stark contrast.”
Streeter added: “The improving relationship with Europe could offer a further boost to growth further down the line, if it translates into fewer trade frictions and closer economic cooperation.”
The UK and EU are expected to announce new trade deals at a summit later this month.
The pound has also benefited as Ninvestors anticipated the Bank of England’s interest rate rise on Thursday, the first in more than three years, which will make it more lucrative for investors to hold funds in sterling.
The Bank of England governor, Andrew Bailey, when asked on Thursday whether a closer relationship with the EU would benefit Britain’s economy, said he was “in favour of trade, trade and openness” because they were a source of growth.
The dollar weakened in the aftermath of the Democrats’ victory on Wednesday, amid a risk-on rally that led to money flowing into other currencies.
Jim Reid of Deutsche Bank said: “When it came to the market reaction, there was relief among investors that the results weren’t disputed, which helped to reduce political uncertainty.
“Moreover, the prospect of divided government also eased concerns about the fiscal trajectory, given it’ll now be more difficult to pass tax cuts or spending packages.”
The pound’s ۱۰-year high was published by the Bank in its sterling effective exchange rate index (EERI), which tracks the pound against a basket of other currencies.
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Calculated by the Bank of England, this index has now hit ۸۶.۵۳۷۲. On the index, ۱۰۰ equals the value of the pound in January ۲۰۰۵.
In ۲۰۱۶ the pound hit a ۳۱-year low against the dollar in the hours after the Brexit vote. That pulled the EERI down to ۸۴.۴۴۱ on ۲۴ June ۲۰۲۶, down from ۸۷.۹۲۴۸ on the day of the referendum. The EERI fell as low as ۷۳.۱ on ۲۳ March ۲۰۲۰, in the Covid pandemic.
On Thursday the pound was flat against the dollar at $۱.۳۴۶۳, having gained more than half a cent on Wednesday. Against the euro, sterling was near an ۱۸-month high of more than €۱.۲۰.
European stock markets also rose on Thursday morning. The FTSE ۱۰۰ and Germany’s Dax were up ۰.۶%, while France’s Cac ۴۰ advanced ۰.۸%, following US markets higher after Donald Trump’s defeat in the midterms.
Ajith Nair, the chief investment officer of Isio Investment Management, said: “The immediate reaction has clearly been positive and provides some welcome respite after the recent wobble in AI-related stocks.
“Markets appear to be taking comfort from the idea that the election result means the Trump administration will face greater constraints in pursuing some of the more disruptive parts of its policy agenda over the final two years of the presidency.
“That may ultimately prove correct, but investors should be careful about getting too comfortable with that assumption. A more challenging Congress does not mean the president is powerless, particularly when it comes to trade and foreign policy.
“If markets are effectively betting on two relatively uneventful years from Washington, that assumption could still be tested.”
