Pound hits highest level since February as election results dim risks

Sterling has rallied to the highest level against the dollar since February after the ruling Conservative party tightened its grip on power and traders cheered the prospects of the country’s reopening after the pandemic.

The pound jumped 0.8 per cent against the dollar on Monday morning to trade as high as $1.4097, while the euro slipped 0.6 per cent against sterling to trade at £0.864. The UK currency has enjoyed a strong run since the end of April, gaining 1.9 per cent against the dollar.

Prime Minister Boris Johnson and his party secured a series of election victories in the UK’s midterm elections held at the end of last week, propelled by the successful vaccine rollout in the country. Traders also bought the pound in anticipation of the government lifting coronavirus restrictions on May 17, which is expected to boost the economy.

The results of the elections confirmed that a second referendum on Scotland’s independence is a risk, but analysts said it was too far out in the future to dent the pound now. Lee Hardman, a currency analyst at MUFG Bank, added that uncertainty about whether or when it would take place had allowed traders to focus elsewhere.

“With independence risk so far in the future, we do not expect the developments to materially alter our outlook for the pound to continue to trade at stronger levels this year,” Hardman said.

The Scottish Nationalist Party’s failure to win an overall majority in last week’s election “has led a lot of people to conclude that there won’t be a referendum in this particular parliament”, said Mark Dowding, chief investment officer at Bluebay Asset Management. “But it might be a little bit short-sighted to think the issue won’t rear its head again. It’s more of a long-term negative than a reason to dislike the pound today.”

The pound also benefited from improved forecasts for the economy from the Bank of England and the announcement that it would start to taper its bond-buying programme. On Thursday, the BoE left its key rate on hold at 0.1 per cent and lifted its estimate for UK economic growth to 7.25 per cent from 5 per cent for this year.

“As the global economic recovery gathers momentum, we expect the pound to advance further, and we forecast sterling at $1.49 by year-end,” said strategists at UBS Wealth Management.

UK government bonds slipped as a result of the more optimistic tone in markets. The 10-year gilt yield, which rises as prices fall, edged up to 0.81 per cent.