The pound has risen to its highest overall level since the June 2016 Brexit referendum, touching 86.4 on a Bank of England index where 100 equals the value in 2005, ahead of an expected interest rate rise on Thursday.
Sterling has climbed notably in recent weeks against both the euro and the dollar, reaching its joint highest level since the referendum on a broader measure tracking 18 of the world's main currencies, according to Bank of England figures. The bank is due to confirm the calculation on Thursday.
The value of sterling fell significantly after the 2016 Brexit vote, and hit further lows during the Brexit process, the Covid pandemic and the 2022 mini-Budget. Some traders said the UK was being seen in a different light given relative political stability, solid growth and the rapprochement with the European Union.
Economist and former Treasury minister Jim O'Neill said he was not surprised. "People were, and to a lesser extent, are, underestimating the improving momentum in the UK," he said.
A stronger pound can help reduce inflation and increase consumers' buying power on imports and holidays. UK economic growth so far this year has beaten expectations, though there are signs that higher energy and fuel prices have dented consumer confidence. The Bank of England's Monetary Policy Committee faces an important decision on interest rates on Thursday, with the first rise in three years widely expected.
Analysis
Why This Matters
- A stronger pound lowers import costs and helps control inflation, directly affecting household budgets for goods and holidays abroad.
- The rise signals a shift in international investor sentiment toward the UK after years of uncertainty from Brexit, the pandemic and the 2022 fiscal crisis.
- Thursday's interest rate decision will test whether the Bank of England sees the recovery as strong enough to tighten policy without hurting growth.
Background
The pound fell heavily after the June 2016 referendum on leaving the European Union, and declined further through the protracted Brexit negotiations, the Covid-19 pandemic and the market turmoil caused by the 2022 mini-Budget. Sterling's recovery in recent weeks reflects improved political stability, stronger-than-expected economic growth and a thaw in UK-EU relations. The Bank of England's preferred broad index measures the pound against 18 major currencies, with a baseline of 100 in 2005.
What to Watch
- The Bank of England's interest rate decision on Thursday and the accompanying vote split on the Monetary Policy Committee.
- Whether sterling can hold its gains if growth data weakens or energy prices continue to rise.
- Any new trade or political friction with the European Union that could reverse the 'rapprochement' cited by traders.