LONDON (Reuters) - Sterling hovered near a 5-1/2-month high against the dollar on Friday, still riding a post-election rally that has left it on track for its best fortnightly performance against the greenback in six years.
Investors had for months worried that no party would win a majority in last Thursday’s UK parliamentary election, which could have led to weeks of policy uncertainty until a coalition emerged.
But that risk evaporated when the Conservatives won an outright majority for the first time in 23 years. Sterling has risen around 3.5 percent since the results were announced, taking its fortnightly rise to over 4 percent - its strongest gains since May 2009.
Currency traders largely brushed off a Bank of England Inflation Report earlier in the week which cut growth forecasts and warned about a strong pound’s impact. Sterling briefly dipped afterwards, but its losses were short-lived.
Some analysts, though, reckon sterling’s post-election rally will be temporary, and see risks for the currency.
“We do not believe (sterling) is sustainable above $1.55 because of the uncertainties ahead,” wrote HSBC analysts. “A referendum on EU membership by end-2017 now seems highly likely and the surge in popularity for the Scottish National Party may bring the future of the UK into question again.”
The pound was flat on Friday at $1.5775, close to a 2015 peak of $1.5815 hit the previous day, its strongest since late November. Against the euro, sterling was 0.1 percent stronger at 72.275 pence.
“The interesting thing is the degree to which the market is concentrating on just the very positive parts of the developments over the past week or so,” said Hamish Pepper, a currency strategist at Barclays in London.
“Sterling has been able to stay well supported despite a neutral to slightly dovish Inflation Report.”
The pound was also boosted earlier in the week by data that showed British earnings growth had picked up more than expected in the first quarter of the year. The Bank is keeping a close eye on labour costs as it considers when to start raising interest rates.
British government bond prices rose sharply in line with German Bunds and U.S. Treasuries, capping a week in which yields have see-sawed wildly.
At 1317 GMT, the 10-year gilt yield was down more than 4 basis points on the day at 1.94 percent.
Additional reporting by Andy Bruce; Editing by Ruth Pitchford