Sterling posts strongest quarterly gains in almost three years

Sterling posts strongest quarterly gains in almost three years

Sterling has recorded its best quarterly performance in nearly three years during a period when transition arrangements were agreed for the UK's departure from the European Union and amid growing expectations the Bank of England could hike rates faster than previously anticipated.

Over the last three months sterling has risen 3.8% to $1.402 against the dollar, the biggest quarterly jump since mid-2015 and its highest level since the UK voted to leave the EU in June 2016. Against the euro the pound was up 1.2% to €1.138.

Sterling's performance has been driven by a number of factors. It was given a boost after Michel Barnier and David Davis announced both parties had agreed a large part of the terms of a Brexit transition deal after the UK leaves the bloc on 29 March 2019, climbing to $1.41 and 87.5 pence per euro.

Brexit blog: UK and EU agree terms on Brexit transition deal

The proposal will enable a transition period of around 21 months after this date, which Barnier described as a "decisive step" in the negotiations.

Furthermore, despite holding interest rates at 0.5%, the Monetary Policy Committee adopted a more hawkish tone by hinting a hike would be needed "somewhat earlier" and to a "somewhat greater extent" as a result of higher-than-expected inflation.

This stance caused the pound to spike 0.8% to $1.399 on 8 February and led markets to price in a 67% chance of a rate rise in May, up from 17% prior to the MPC's decision.

Adrian Lowcock, investment director at Architas, commented: "Brexit negotiations have weighed on the pound since the vote to leave in 2016, but progress has been made and there has been a break in the negotiations.

"At the same time, economic collapse has not engulfed the UK and the country is growing slowing so there is a relief amongst investors that things did not end up as badly as initially expected."

The continued weak dollar has also been a factor as concerns grow over the US's debt levels after President Donald Trump's Tax Cuts and Jobs Act reform bill was passed late last year.

"The weaker US dollar has also had a role to play in the pound's strength and this is harder to fathom as rising interest rates in the US should be supportive of a stronger currency," Lowcock continued.

"However, there are concerns over the increased debt burden on the US economy as a result of Trump's tax cuts and the interest rate rises in the US have largely been anticipated if not announced."

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