Sterling pared gains on Monday against the dollar, which hit one-week highs across the board after a surprise victory for Donald Trump in the US presidential election. The pound dipped in and out of negative territory in volatile trade as the dollar recovered against a basket of currencies on the day, while markets weighed the impact of a Trump presidency on global growth.
Investors were caught off-guard after pricing in a victory for the perceived status quo candidate Hillary Clinton and are now adjusting to the uncertainty over which policies Trump will enact and what his victory means for other populist movements. "We have a string of European political events coming in the next three to six months," BMO Capital Markets currency strategist Stephen Gallo said, referring to an upcoming Supreme Court ruling on the procedure for Britain's divorce from the European Union and a referendum in Italy this year, followed by French and German elections in 2017.
"The US has now had its protest vote (for anti-establishment Trump), the UK had its protest vote with Brexit. Now from a political perspective, the EU outside of the UK looks to be an area of vulnerability." Data on Wednesday showing Britain's trade deficit with the rest of the world narrowed in the three months to September took a backseat to the US election results - the pound hardly moved on the figures.
Sterling was trading at $1.2430, having earlier hit $1.2547 before the final election outcome, its highest since enjoying its best weekly gains against the greenback in seven years last week. The euro was down more than one percent against the pound, trading around 88.09 pence at 1544 GMT. Sterling is still down more than 16 percent against the dollar since the British vote to leave the European Unions in June. With memories of that unexpected outcome still fresh, traders are cautious.
"Now the dollar and the pound are two highly charged political risk currencies," CMC Markets chief market analyst Michael Hewson. "There's a lot of political risk surrounding both of them so obviously any weakness the dollar will have is mitigated by Brexit." While declines have been orderly, markets are bracing for a period of volatility as Trump's victory could also influence the US Federal Reserve's monetary policy.