Why has the pound strengthened?
The pound has confounded expectations by shooting up in the past week, despite the triggering of Article 50 last Wednesday and the response from European Council president Donald Tusk on Friday.
The pound nearly hit €1.18 just before the weekend and has bobbled around between €1.165 and €1.175 since, a good 2 cents above its average in March.
I say shooting up, but let’s get this into perspective, the pound is still way down on the €1.30 of this time last year before the referendum. Nevertheless, it shows continued resilience. If the pre-referendum warnings had come true, and the initial post-referendum nosedive to €1.10 continued, it would have been worse. It also means that a £200,000 property costs around €3,000 less than this time last week. So that’s the new patio paid for!
So why is the pound proving the pessimists wrong? Here are five possible reasons:
1. We knew it was coming
Unlike the surprise result of 24th June, Article 50 was expected and had been “priced in”. Currency traders and banks had bought the currency they needed in advance and there was no shock to the system.
2. Positive comments from policymakers
Upbeat comments from both European politicians and the Bank of England policy makers gave the pound a leg up. First up was Donald Tusk who said that he believes a new trade deal between the UK and the EU can be forged within the specified timeframe, provided both sides are committed to come to an agreement.
More good news followed when Bank of England monetary policy committee member Ian McCafferty hinted that he may vote for an interest rate hike over the coming months. That means that two of the nine decision makers may vote to raise interest rates this year. Higher rates tend to attract foreign investment, increasing demand for and the value of its currency.
3. Positive economic data
Currencies are at the mercy of politics and economics. Britain’s economic data was a cause of celebration too, with encouraging news on the growth of the UK’s services sector as recorded in the Purchasing Managers’ Index (PMI) reading for March. As the largest sector in the UK – accounting for roughly 70% of economic activity – any good news is welcomed by the pound.
4. The joys of spring
No one is 100% sure why but historically the pound tends to rally against both the US dollar and euro in April. Because the experts are yet to find a plausible theory for this annual occurrence they are reluctant to rely on it, as it’s not set-in-stone. Once again, however, April seems to be working its magic for the pound.
5. The euro has its own problems
The Eurozone has enough on its plate at the moment without having to worry about Brexit. The upcoming French presidential election and the rise of extremist candidates like the far-right, anti-EU Marine Le Pen is creating political uncertainty that the pound has been able to benefit from in terms of its relationship with the euro.
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