By Basant El-Faramawy
The pound has reached its strongest level against a basket of currencies since the day of the 2016 Brexit referendum, according to Bank of England data released on Thursday.
The sterling effective exchange rate index (EERI) climbed to 86.5372 on Wednesday, its highest since 23 June 2016. The index, where 100 represents the pound's value in January 2005, had fallen to 84.441 the day after the Brexit vote and hit a low of 73.1 during the Covid pandemic in March 2020.
The gains follow a drop in the US dollar after the midterm elections, which reduced political uncertainty and eased concerns about fiscal policy. The dollar's decline prompted a risk-on rally that lifted other currencies.
Dollar weakness and rate expectations
Jim Reid of Deutsche Bank said investors were relieved that the election results were not disputed, making it harder to pass tax cuts or spending packages. The pound also benefited from expectations that the Bank of England would raise interest rates for the first time in over three years on Thursday, increasing the appeal of holding sterling.
Against the dollar, the pound was flat at $1.3463 on Thursday after gaining more than half a cent on Wednesday. Versus the euro, sterling dipped slightly to €1.1985 after hitting an 18-month high above €1.20 in late October.
Market reaction
European stock markets rose on Thursday, with the FTSE 100, Germany's Dax, and France's Cac 40 all advancing between 0.6% and 0.8%, following gains in US markets.
Ajith Nair, chief investment officer at Isio Investment Management, said the immediate reaction was positive but cautioned investors against assuming two uneventful years from Washington, noting that a divided Congress does not render the president powerless on trade and foreign policy.
