Sterling has climbed to its strongest level against a basket of major international currencies since the Brexit referendum, marking a significant recovery for a currency battered by a decade of political turmoil, economic shocks and repeated uncertainty over Britain’s future.
The Bank of England’s sterling effective exchange rate index, which measures the pound against 18 other currencies, reached 86.4 on Wednesday, its highest level since the June 23 2016 referendum. The index had stood at 87.4 on referendum day before the result was announced, which triggered a sharp sell-off in the currency.
The pound plunged after Britain voted to leave the European Union, reaching a 31-year low against the dollar in the aftermath. Its recovery has since been interrupted by the Covid pandemic, the 2022 mini-budget crisis and successive general elections.
Sterling’s latest gains have been supported by expectations of higher interest rates, with investors positioning themselves ahead of Thursday’s Bank of England decision to raise borrowing costs to 4 per cent. It was the first increase in more than three years.
The pound rose by around half a cent against the dollar on Wednesday before slipping 0.1 per cent to $1.346 following the announcement. Against the euro, sterling was broadly unchanged at €1.20 after having reached an 18-month high last month.
But the currency’s resurgence reflects weakness among its international rivals as much as renewed confidence in Britain.
The dollar has come under pressure following the sweeping US midterm election victories for Democrats, which have intensified political uncertainty surrounding President Donald Trump’s administration. Meanwhile, the euro has faced headwinds from concerns about France’s public finances.
The combination has helped sterling strengthen against a broad range of currencies, even as Britain’s own economic outlook remains challenging.
The Bank of England’s effective exchange rate index stood at just 73.1 in March 2020, when the coronavirus pandemic triggered a global financial market shock. The index uses 100 as the benchmark value of sterling in January 2005.
The latest recovery therefore represents a substantial reversal of the pound’s fortunes after years of political instability and economic disruption.
However, the strength of sterling should not be mistaken for an unequivocal endorsement of Britain’s economic performance. A weaker dollar, concerns about the eurozone and shifting expectations for interest rates have all contributed to the advance.
For investors, the pound’s return to levels last seen around the Brexit referendum marks a notable milestone. Whether it can sustain those gains will depend on the Bank of England’s next moves, Britain’s economic performance and the continued fortunes of the dollar and euro.
