Pound sterling value rise: How has it gone from the worst to best performing major currency?
Traders might be looking at the prospect of destabilising victories for populists in European elections and are upgrading their view of the relative prospects for sterling in that light
Sterling is up 0.6 per cent today at $1.2635, having earlier hit its highest level since the flash crash in early October.
This also caps a very strong week for the pound. Since the US election result it has risen about 2.2 per cent against the dollar.
We’ve become accustomed to the assumption that in the wake of Brexit the only way for the pound is down.
So what is going on?
Is this all about Donald Trump winning the US election?
That has certainly been a factor in currency movements this week.
The value of the dollar against many currencies (except the Mexican peso) was reduced when it dawned on traders that, against most expectations, Mr Trump was heading to the White House.
The dollar index, which is the value of the dollar weighted against other major currencies, fell by almost 2 per cent on the night of the election.
That dollar weakness helped push up the value of the pound versus the dollar.
But there’s more to it than that?
Yes. The dollar index has actually recovered all that lost ground now.
And sterling’s strength is not only relative to the dollar.
It’s also up against the euro this week, hitting a seven-week high of €1.1597.
The trade-weighted value of sterling index – which calculates the value of the pound based on which countries we do most trade with – rose almost 3 per cent this week to its highest level since the end of September.
And of the 32 major currencies sterling has shown the best performance against the Greenback over this week.
So why is sterling stronger?
Some analysts say that traders might be looking at the prospect of economically destabilising victories for populist forces in European elections in France and Italy – in a kind of Brexit/Trump global domino effect – and are upgrading their view of the relative prospects for sterling in that light.
“There are fears that there could also be populist votes in the EU in their upcoming elections and referendums. Perhaps then the UK currency has been unfairly punished in recent months,” said Alastair Archbold of the Foremost Currency Group.
Some have floated the idea that because the President-elect has said he would want to do a major trade deal with the post-Brexit UK, the currency is getting a fillip.
Others suspect that traders have simply been distracted from Brexit.
“At the very least this week’s events have shifted the focus away from the UK’s impending departure from the EU,” said Chris Sain of HL Currency Service.
Will this continue?
Against the dollar many analysts and economists expect the pound to continue to do quite well – especially if signals suggest Mr Trump’s economic policies will be as destructive as promised in the campaign.
“If he tries to pursue radical populist policies, the response will be swift and punishing: stocks will plummet, the dollar will fall, investors will flee to US Treasury bonds, gold prices will spike, and so forth,” says Nouriel Roubini, of NYU’s Stern School of Business.
But it’s complicated.
In the short term a US fiscal infrastructure stimulus could compel the Federal Reserve to put up its policy interest rates faster than expected to contain inflationary pressures, which would tend to support the dollar’s value.
So is Brexit punishment for sterling over?
That would be a bold assumption.
Many analysts expect the Brexit fears to kick in again before too long and push sterling back down.
“Regardless of the short-term gains, Sterling remains cursed by the Brexit woes in the longer term with the current technical bounce providing a foundation for sellers to pounce in the coming weeks,” said Lukman Otunuga of FXTM Research.
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