Pound hits highest level since its post-Brexit crash, sterling effective index at 86.53

The pound has hit its highest level since its crash in the wake of the Brexit referendum a decade ago. Data released by the Bank of England on Thursday showed that the pound reached its strongest level against a basket of other currencies since 23 June 2016 — the day of the EU referendum vote — on Wednesday.

The rise follows the drop in the value of the US dollar after the midterm elections. But it also reflects the pound's recent strength against other currencies such as the euro and the yen, not just the dollar.

Expectations in the market have also lifted sterling. Investors expect the Bank of England to raise interest rates for the first time in more than three years at midday on Thursday, which would make it more lucrative for investors to hold funds in sterling.

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, which also benefited the pound.

Jim Reid of Deutsche Bank said there was relief among investors that the results were not disputed, which helped to reduce political uncertainty. He added that the prospect of divided government also eased concerns about the fiscal trajectory, given it will now be more difficult to pass tax cuts or spending packages.

The pound's 10-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. The index has now hit 86.5372. On the index, 100 equals the value of the pound in January 2005.

By comparison, in 2016 the pound hit a 31-year low against the dollar in the hours after the Brexit vote. The index stood at 87.9248 on the day of the referendum and fell to 84.441 the next day. During the Covid pandemic, the EERI fell as low as 73.1 on 23 March 2020.

On Thursday the pound was flat against the dollar at $1.3463, having gained more than half a cent on Wednesday. Against the euro, sterling was slightly lower at €1.1985, having hit an 18-month high above €1.20 at the end of October.

European stock markets also rose on Thursday morning, following US markets higher after Donald Trump's defeat in the midterms. The FTSE 100 and Germany's Dax were up 0.6 percent, while France's Cac 40 advanced 0.8 percent.

Ajith Nair, the chief investment officer of Isio Investment Management, said the immediate reaction had clearly been positive and provided some welcome respite after the recent wobble in AI-related stocks. He said markets appeared 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.

But Nair also urged caution. That assumption may ultimately prove correct, he said, but investors should be careful about getting too comfortable with it. A more challenging Congress does not mean the president is powerless, particularly when it comes to trade and foreign policy, and if markets are effectively betting on two relatively uneventful years from Washington, that assumption could still be tested.