The British pound has notched a new post-Brexit-vote peak this week, leading one analyst to quip “What Brexit?”
But that analyst — London Capital Group’s Jasper Lawler — is also quick to suggest why sterling bulls shouldn’t turn too euphoric. The currency briefly traded just below $1.44 on Tuesday, touching levels last seen in June 2016, as shown in the chart above.
“The caveat is that it is in dollar terms,” wrote Lawler, LCG’s head of research, in a note Tuesday.
“On a trade-weighted basis, sterling is heading in the right direction, but there is still some way to go to recover the drop since Brexit,” he said.
The U.K.’s biggest trading partner by far is the European Union, the bloc that the country is planning to leave after the Brexit referendum on June 23, 2016.
And the pound GBPUSD, -0.4689% hasn’t performed as well against the euro EURUSD, +0.1698% , the most widely used currency in the EU. So that explains why sterling’s action on a trade-weighted basis — shown below — isn’t as impressive.
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The British currency on Wednesday was changing hands around $1.42, weighed down by disappointing U.K. inflation data. That puts it just 5% below its pre-referendum level around $1.50, and well above a “flash crash” low under $1.20 hit in October 2016.
Against the euro, the pound has lots more ground to make up. It briefly has traded this week above €1.16, marking an 11-month high, as shown in the chart below. Yet that’s still 12% below its pre-referendum level around €1.31. Sterling GBPEUR, -0.6147% on Wednesday was buying €1.1479.
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The pound’s rally has been fueled in part by rising expectations the Bank of England will raise interest rates at its May meeting. Wednesday’s weaker-than-expected reading on U.K. inflation tamped down those expectations slightly.