Sterling surged to more than $1.41 as investors celebrated the Scottish National Party’s failure to win a majority in Holyrood’s elections, pushing the prospect of a second independence referendum off the table for now.
The rise of more than 1pc against the dollar to a two-month high was matched by a similar appreciation against the euro meaning the pound is worth more than €1.16.
Nicola Sturgeon’s party won 64 seats in the Scottish Parliament, one short of the 65 needed for a majority, which FX analyst John Hardy at Saxo Bank said means international investors can put referendum fears “in the rearview mirror” and buy more UK assets.
“Clearly the market was concerned the SNP could get an outright majority and this could shorten the timeline to some eventual new referendum campaign,” he said.
“By falling one seat short, the mandate isn't quite there and it sends the whole referendum scenario over the horizon for investors.”
This is combined with a strong economic outlook as well as some wobbles in the US which make the dollar relatively less attractive, strengthening sterling.
Francesco Pesole, an FX strategist at ING, said the fundamental picture is one of a strong economy supporting the pound.
“Hopes of a strong economic rebound continue to be fuelled by the reopening plans in the UK and this should continue to put a floor under sterling,” he said.
At the same time markets reacted badly to Friday’s weak jobs report in the US which saw the unemployment rate creep up to 6.1pc in April, raising fears for the sustainability of the recovery in the world’s largest economy.
Analysts at UBS predict a wider shift away from US assets as the rest of the world recovers, which could push the pound to $1.49 by the end of the year.
A rise on this scale would put sterling back up at a level last seen before the Brexit vote knocked the currency five years ago.