The pound has broken the psychological level of $1.40, securing its return to levels it traded in the run-up to the Brexit vote and establishing the UK currency as one of the strongest performers so far in 2018.
While a lot of sterling’s gains this year are due to the general weakness of the US dollar, several analysts detect a more upbeat mood among investors regarding Brexit talks.
Sterling rose to $1.4002 on Tuesday morning in Asia trading.
The pound’s value against the euro, seen as a better proxy for Brexit progress than the pound’s performance against the dollar, had been relatively subdued since the start of the year, but has risen 1.3 per cent in the last four trading days.
On Monday, the pound broke €1.14, a one-month high, while speculative bets on sterling are at their highest level since July 2014, according to positioning data.
Brexit talks resume in March, but French President Emmanuel Macron provided some impetus for the pound on Sunday, saying that it was possible for the UK to have its “own solution” when it came to negotiating a trade agreement with the European Union.
The pound is the best performing G10 currency in the past six months, rising 7.3 per cent against the dollar. Currency analysts expected a bounce in December after UK concessions on the exit bill and citizens’ rights enabled the EU to agree to allow negotiations to move to a second phase. But sterling was largely unmoved until the start of the year, when dollar weakness became the prevailing market theme.
In the modern era of floating currencies, the pound has rarely spent much time below $1.40. Before the EU referendum result in June 2016, it was trading at $1.50.
Having twice broken below $1.20 since the referendum, in October 2016 and January 2017, the pound has slowly recovered. The market will now test how far the prospect of a soft exit from the EU can help push the pound over $1.40, its longstanding floor against the dollar since the 1980s.
That will depend not just on Brexit progress but positive UK data, say traders. The other key factor is how deeply the US dollar remains stuck in its bearish pattern. The reserve currency has failed to find support from stronger US economic data and the passage of tax cuts, as well as higher Treasury yields and rising market expectations of inflation.
Sterling’s more muted performance in trade-weighted terms suggested the currency remained tarred with the Brexit brush. The Bank of England’s broad sterling index is up just 2 per cent over the past year, while the pound has gained more than 12 per cent versus the US dollar.
But the pound’s most recent uptick against the euro and other currencies points to Brexit optimism among traders.
Thomas Flury at UBS said last week: “It looks like the pound is becoming increasingly resilient . . . Markets have probably become more confident that a cliff-edge Brexit in 2019 will be avoided.”