Sterling surges above US$1.41, helped by Scotland relief and dollar weakness

[LONDON] The pound climbed to as high as US$1.4158 on Monday, its strongest in more than two months, fuelled by a combination of dollar weakness, improved economic forecasts, lockdown easing measures and market relief about the outcome of the Scottish election.

Pro-independence parties won a majority in Scotland's Parliament on Saturday, which Scottish leader Nicola Sturgeon said gave her a mandate to push ahead with plans for a second independence referendum.

But the pound strengthened as market participants did not interpret this as a near-term risk as Ms Sturgeon's party did not win an outright majority. Ms Sturgeon said that her first task was to deal with the Covid-19 pandemic.

"The market has basically judged that she's certainly not walking away with a very, very strong mandate for a imminent referendum," said Ned Rumpeltin, head of European currency strategy at TD Securities.

Any second referendum on Scottish independence requires the approval of the British government and Prime Minister Boris Johnson has ruled this out.

At 2.23pm GMT, the pound was up 1.1 per cent on the day at US$1.4125, having crossed the key US$1.40 level for the first time since February during the Asian session, and risen above US$1.41 during the European morning session.

Versus the euro, it was up 1 per cent at 86.035 pence per euro, having earlier hit 85.97.

Analysts said the move in the pound versus the dollar was also due to dollar weakness, as the greenback dropped to a two-month low after a disappointing US employment report.

Sterling's gains could also be a delayed reaction to the Bank of England (BOE) raising its forecast for British economic growth at its meeting last week, some analysts said.

The BOE slowed the pace of its trillion dollar bond-purchasing programme on Thursday, but stressed it was not reversing its stimulus.

"We read the move as more of a legacy as the market is moving towards the Bank of England's bullish set of UK forecasts and now greater confidence in the soft dollar environment," ING FX strategists wrote in a note to clients.

Mr Johnson is due to set out the next phase of lockdown easing in England, with the changes to begin on May 17.

"The re-opening of the dominant UK services sector as lockdown restrictions are removed is expected to provide a further boost for sterling," said Stuart Cole, head macro economist at Equiti Capital.

Sterling-dollar FX futures volumes are up 57.4 per cent so far in May compared to the same period in May 2020 and there were US$10.9 billion of sterling-dollar futures traded on Friday, which is above the year-to-date average of US$7.8 billion, according to data from CME.

Elsewhere, CFTC positioning data showed that speculators reduced their net long position on the pound in the week to May 4.

REUTERS