Sterling index reaches joint post-referendum high of 86.4

By Daniel Okafor

Bank of England figures show sterling's index against 18 major currencies reached 86.4 this week. It is the joint highest level since the June 2016 referendum. More than a decade separates that vote from this week's reading. The index uses 100 to mark sterling's value in 2005. The Bank will officially confirm the calculation on Thursday.

The measure is the most watched gauge of the pound's overall value. It combines sterling's bilateral moves into one score. The 86.4 reading therefore describes broad sterling strength. It is not a quote for sterling against any single currency.

Sterling's recent gains against the euro and the dollar provide the bilateral context. The index remains below its 2005 benchmark, so the joint high marks a recovery from the post-referendum lows rather than a return to that benchmark.

What has changed since the referendum?

Sterling fell significantly after the June 2016 vote. It reached further lows during the Brexit process. The currency also fell during the Covid pandemic. It reached further lows at the 2022 mini-Budget. Those episodes followed the initial post-referendum decline.

Sterling has since reversed part of that loss. It has risen notably against the euro and the dollar in recent weeks. The advance came ahead of an expected rise in interest rates.

Some traders said the UK was being seen in a different light. They cited relative political stability, solid growth and rapprochement with the European Union. Sterling has responded strongly to Brexit developments and political uncertainty in recent years. That record shows how closely traders have watched sterling for signs of political change.

Jim O'Neill, an economist and former Treasury minister, said:

"I'm not surprised. People were, and to a lesser extent, are, underestimating the improving momentum in the UK,"

O'Neill's comment separates the index level from the country's underlying momentum. His claim is that markets have underestimated the improvement behind it. The traders' political explanation and O'Neill's economic explanation point in the same direction.

They describe a UK that looks stronger to investors, even though the index has not returned to its 2005 reference level. That tension makes Thursday's decision consequential for the currency.

How does a stronger pound affect households?

A stronger pound can help rein in inflation. It also increases consumers' buying power for imports and on holidays. The inflation channel runs through the price of foreign goods and services. The purchasing-power channel applies when UK consumers spend abroad.

For households, the currency's advance changes both the cost of imported purchases and the amount of British spending power they can take abroad.

The report says UK growth so far this year has outperformed all expectations. But there are signs that higher energy and fuel prices have now hit consumer confidence.

The national economy and household sentiment are sending mixed signals. Growth has surprised positively, while rising costs have dented confidence. Currency strength offers some relief to that pressure, but the source also flags signs of weaker sentiment.

What does Thursday's rate decision change?

The Bank of England's nine-member Monetary Policy Committee faces an important rate decision on Thursday. A first rise in three years is widely expected. Thursday also brings official confirmation of the sterling index calculation. The confirmation will cover the reading that reached 86.4 this week. By then, sterling has reached its joint highest level since June 2016.

The pound's advance against the euro and dollar came ahead of the expected increase. Markets have moved before the policy decision itself. That sequence makes Thursday's decision relevant to sterling's next move. O'Neill's claim about improving momentum will face a new test.

Thursday will test whether improving growth and relative political stability can support sterling while higher energy and fuel prices weigh on consumer confidence.