The pound has reached its highest level since the day of the Brexit referendum in June 2016, according to the Bank of England's sterling effective exchange rate index (EERI). The index hit 86.5372 — still below the 87.9248 recorded on referendum day itself, and well short of the January 2005 baseline of 100, but a full recovery from the 73.1 nadir during the Covid pandemic in March 2020. Three distinct forces are driving the move, and only one of them is structurally about Britain. The most immediate catalyst is the US midterm elections. The Democrats' victory prompted a classic risk-on rally, weakening the dollar and sending capital into other currencies. Jim Reid of Deutsche Bank framed the reaction as relief that results weren't disputed, plus the fiscal discipline implied by divided government — harder to pass tax cuts or spending packages under split control. European equities rose in sympathy: the FTSE 100 and Dax gained 0.6%, the Cac 40 advanced 0.8%. The second driver is monetary: the Bank of England raised interest rates on Thursday, its first hike in more than three years. Higher rates make sterling-denominated assets more attractive to global capital, a mechanical boost to the currency. Governor Andrew Bailey, asked about closer EU ties, offered a notably warm endorsement — "I am in favour of trade, trade and openness" — framing it as a growth source rather than a political question. The third and most structurally interesting force is the UK-EU trade rapprochement. A summit later this month is expected to produce new trade deals, with Andy Burnham reportedly set to unveil agreements worth billions of pounds. Susannah Streeter of Wealth Club argued the UK is "beginning to be viewed in a more favourable light by international investors," with its stability reputation recovering, partly by contrast with political difficulties in France. Sterling was near an 18-month high against the euro at more than €1.20. The risk is that markets are front-running a structural shift that hasn't materialized yet. The EERI recovery tells a sentiment story, not a productivity story. The UK's trade frictions with the EU remain largely intact, and a summit communiqué is not a customs union. Ajith Nair of Isio Investment Management warned that markets may be "betting on two relatively uneventful years from Washington" — an assumption that could be tested, particularly on trade and foreign policy where presidential power is least constrained by Congress. The pound's journey from 87.9 to 73.1 and back to 86.5 over a decade is a chart of political shocks absorbed and partially recovered. What it does not yet show is whether the UK economy has structurally adapted to its post-Brexit trading position or is simply benefiting from everyone else's problems — a weak dollar, French instability, and a brief window of transatlantic calm. If the EU summit delivers substantive friction reduction, the pound's recovery has a foundation. If it delivers communiqués and photo opportunities, this is a sentiment trade waiting for a correction.
