Sterling steadied above $1.41 on Tuesday after posting its best day against a weakening dollar at the start of the week on market relief over Scottish election results, improved economic forecasts, and lockdown easing measures.
Analysts say the results of the Scottish election – in which the Scottish National Party did not secure an outright majority – was a relief for the currency, which had been trading away from its fair value against the euro owing to the election uncertainty.
Pro-independence parties won a majority in Scotland’s parliament on Saturday, which Scottish leader Nicola Sturgeon said gave her a mandate to pursue plans for a second independence referendum.
Any second referendum on Scottish independence requires the approval of the British government and Prime Minister Boris Johnson has ruled this out.
“As we have argued previously, the Scottish elections were not supposed to have a long lasting negative impact on the pound and the pound rally yesterday provided a case in point,” said Petr Krpata, chief EMEA FX and IR strategist at ING.
“With the UK government confirming the next step of the reopening of the economy, the solid UK data points this quarter should benefit sterling.”
By 0747 GMT, sterling was 0.1% higher against the dollar at $1.4135, shy of the 2-1/2-month peak of $1.4158 hit on Monday.
Against the euro, the pound traded flat at its one-month high of 85.88 pence per euro.
“Euro-sterling moved a full figure lower yesterday to below 86 pence, as investors moved beyond the Scottish Parliament election,” said Mikael Olai Milhøj, chief analyst at Danske Bank.
“Another Scottish independence referendum is far away and hence not something markets will trade on near-term.”
Sterling is the third best performing G10 currency against the US dollar year-to-date, trailing the commodity-linked Norwegian crown and the Canadian dollar. As of the end of Monday, sterling was up 3.4% this year against the greenback.
The pound has also benefited from the Bank of England beginning to taper its bond purchasing programme last week, on the back of an improving economic outlook.
Prime Minister Johnson on Monday confirmed that England could continue to the next stage of his four-step plan to bring the country out of lockdown by the summer, as the COVID-19 situation improved thanks to the rollout of vaccines and social restriction measures.
CFTC positioning data showed that speculators reduced their net long position on the pound in the week to May 4 .
