Sterling has rallied to its highest level against the dollar since February after the UK Conservative party tightened its grip on power and the prospects of a referendum in the near future on independence for Scotland dimmed.
The pound jumped 1.3 per cent against the dollar on Monday afternoon to trade as high as $1.4147, while the euro slipped 1.1 per cent against sterling to trade at £0.8601. The UK currency has enjoyed a strong run since the end of April, gaining 2.4 per cent against its US peer.
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 Covid-19 vaccine rollout in the country.
At the same time, the Scottish National 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.
Lee Hardman, a currency analyst at MUFG Bank, added that uncertainty about whether or when a referendum 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.
Analysts say the prospect of a break-up of the UK, at a time when the country is still grappling with the fallout from Brexit, would knock confidence in the currency.
“There are so many complex ramifications [of Scottish independence], that anything that makes a referendum seem a little less likely is bound to be greeted with some relief in markets,” said Jane Foley, head of currency strategy at Rabobank. “We know from Brexit that political uncertainty can mean that investors shy away from investing. This is perhaps an even bigger potential disruption.”
Traders have also bought the pound in anticipation of the government lifting restrictions on May 17, which is expected to boost the economy.
Johnson is expected to announce a further relaxation of the rules on Monday afternoon, with the cabinet set to sign off on the third stage of lifting the Covid-19 lockdown in England. Indoor serving in pubs and restaurants is set to resume from next week, hotels and cinemas will reopen and indoor sport and exercise will also be permitted.
Ahead of that announcement, the UK lowered its Covid-19 alert status to level three, reflecting a consistent reduction in infections, hospitalisations and deaths from the disease since the end of February.
According to the government definition, level three means there is an epidemic “in general circulation” but transmission is no longer high or rising exponentially.
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. The BoE on Thursday 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.