LONDON (Reuters) - Sterling powered past $1.40 to reach its highest level since the vote to leave the European Union in June 2016 on Tuesday, extending a rally on the back of growing optimism around Britain’s chances of securing a favourable Brexit deal.
Sterling has climbed 4 percent since the start of the year against the dollar, putting it on track for its strongest month in more than four year against a dollar that has weakened across the board.
On a trade-weighted basis, too, the pound has made significant gains, with the Bank of England’s sterling index hitting an eight-month high on Monday.
Analysts said although there had been little in the way of solid developments around Britain’s exit from the EU since the start of the year, the noises coming from Europe had appeared to be largely positive, and sterling was more sensitive to good news than bad.
French President Emmanuel Macron said on Saturday Britain would be able to have a bespoke deal with the trading bloc - one of Prime Minister Theresa May’s objectives - though London’s financial centre could not enjoy the same level of access to the EU under May’s current Brexit plan.
“Even small steps are currently quite powerful (for the pound), but for it really to kick on from here you’re going to need to see more meaningful progress,” said ING currency strategist Viraj Patel. “The bar to sell the pound is really high.”
Sterling climbed as much as 0.3 percent to $1.4030, its strongest since June 24, 2016. Against a broadly stronger euro, it was flat at 87.72 pence.
“Sterling is benefiting from the broad dollar weakness story and the recent data has been mildly supportive,” said Thomas Flury, head of FX strategies, UBS Wealth Management, Chief Investment Office.
Data on Friday showed speculators increased their net long sterling positions - or bets that it will rise - to the highest level in 3-1/2 years, on the view that Brexit talks had so far gone relatively well and the UK economy was ticking along better than many had expected.
Currency traders believe the mood in London and Brussels suggests both sides are more amenable to hammering out a transition agreement between Britain and the trading bloc, and then an eventual deal for the terms of departure.
“There is definitely a feeling that Brexit is now far more likely to be ‘soft’, which underestimates the risk for more problems ahead in our view but for the time being is leading to demand for GBP,” said John Marley, head of FX strategy at Infinity International, a currency risk management firm.
Reporting by Saikat Chatterjee and Tommy Wilkes; Editing by Janet Lawrence