Sterling reaches 10-year high after U.S. midterm elections

Bank of England index reached 86.5372 ahead of expected rate increase

The pound reached its strongest level against a basket of currencies since June 23, 2016, according to Bank of England data released on November 5. The bank’s sterling effective exchange rate index reached 86.5372 on Wednesday, marking a 10-year high for sterling.

The sterling effective exchange rate index, or EERI, is calculated by the Bank of England and tracks the pound against a basket of other currencies. A reading of 100 equals the pound’s value in January 2005. The Wednesday reading reflected both the decline in the U.S. dollar after the U.S. midterms and sterling’s gains against currencies including the euro and yen.

Wednesday’s advance also reflected expectations that the Bank of England would raise interest rates at midday on Thursday for the first time in more than three years. A higher rate would make it more lucrative for investors to hold funds in sterling.

The dollar weakened after the Democrats’ victory amid a risk-on rally that sent money flowing into other currencies. European stock markets also rose on Thursday morning: the FTSE 100 and Germany’s Dax gained 0.6%, while France’s Cac 40 advanced 0.8%. The European gains followed higher U.S. markets after Donald Trump’s defeat in the midterms.

Against the dollar, sterling was flat at $1.3463 on Thursday after gaining more than half a cent on Wednesday. Against the euro, sterling was slightly lower at €1.1985, after hitting an 18-month high above €1.20 at the end of October.

The June 2016 referendum vote was followed within hours by a 31-year low for the pound against the dollar. The EERI fell to 84.441 on the day after the vote, down from 87.9248 on referendum day, and later reached a low of 73.1 on March 23, 2020, during the Covid pandemic.

Jim Reid of Deutsche Bank said, “When it came to the market reaction, there was relief among investors that the results weren’t disputed, which helped to reduce political uncertainty. Moreover, the prospect of divided government also eased concerns about the fiscal trajectory, given it’ll now be more difficult to pass tax cuts or spending packages.”

Ajith Nair, chief investment officer of Isio Investment Management, said, “The immediate reaction has clearly been positive and provides some welcome respite after the recent wobble in AI-related stocks. Markets appear to be taking comfort from the idea that the election result means the Trump administration will face greater constraints in pursuing some of the more disruptive parts of its policy agenda over the final two years of the presidency.”

Nair then qualified that interpretation: “That may ultimately prove correct, but investors should be careful about getting too comfortable with that assumption. A more challenging Congress does not mean the president is powerless, particularly when it comes to trade and foreign policy. If markets are effectively betting on two relatively uneventful years from Washington, that assumption could still be tested.”