Forex overview: Sterling holds up well, despite Scottish election

05/10/2021 | 10:39am

The pound rose above the symbolic USD1.40 level for the first time in more than two months on Monday, despite the victory of pro-independence parties in the Scottish election. Pro-independence parties won a majority in the Scottish parliament on Saturday, setting the stage for a high-stakes political, legal and constitutional battle with UK Prime Minister Boris Johnson over the future of the UK.

But the pound strengthened as market participants did not interpret this as a short-term risk. "The likelihood of a second referendum is likely to increase but its holding is not yet certain and the potential timeline remains unclear," Lee Hardman, currency analyst at MUFG, wrote in a note to clients. "With the risk of independence so far into the future, we do not expect developments to materially alter our outlook for the pound to continue trading at stronger levels this year, supported by the UK's robust cyclical recovery and largely diminished Brexit risks."

Any second referendum on Scottish independence requires the approval of the UK government and Prime Minister Boris Johnson has ruled out that possibility, saying the country needs to focus on more pressing concerns such as the recovery from the pandemic.

Analysts said the cable move was due more to dollar weakness, with the greenback falling to a two-month low after a disappointing US jobs report. The Bank of England said last week that the U.K. economy would grow at its fastest pace since World War II this year and slowed the pace of its bond-buying program. Marshall Gittler, head of investment research at BDSwiss Group, wrote in a note that the pound could also benefit from the fact that the Labour Party was defeated in the weekend polls. "The strengthening of Tory control is seen as a good thing by financial markets who are reflexively conservative," he said.

Pound vs. euro and dollar
Pound vs. euro and dollar

Dollar falls in Asia too

Meanwhile, most Asian currencies have advanced against the dollar earlier this week, particularly the Indonesian rupiah and the Chinese yuan. The greenback's bout of weakness came on the back of mixed monthly US employment data, which suggested that rates will remain low for longer than expected. Higher U.S. rates generally make the dollar a more attractive investment compared to riskier high-yielding securities.

Currency crosses

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