Published by Global Banking & Finance Review®
Posted on January 6, 2026
2 min readLast updated: January 20, 2026
Add as preferred source on GoogleSterling hits highest value since September against dollar and euro, driven by positive investor sentiment and UK's fiscal stability.
LONDON, Jan 6 (Reuters) - Sterling hit its highest in nearly four months against both the dollar and euro on Tuesday, buoyed by improved global investor sentiment, easing worries about Britain's fiscal position and hints of Britain pursuing a closer relationship with Europe.
The pound hit its highest since mid-September on the dollar, and was last flat on the day at $1.3536, while the euro dropped as low as 86.44 pence again, its lowest in nearly four months, extending the previous day's 0.57% fall.
The move in euro/sterling was particularly notable as British and euro zone interest rates have largely moved in unison - relative changes in interest rates are often major factors in currency moves.
Instead, analysts pointed to a melange of factors behind sterling's strength.
Lee Hardman, senior currency analyst at MUFG, noted the pound typically outperforms when investor sentiment is positive - world stocks are at record highs - and that as the pound had now recovered all its losses in the run-up to last year's budget, it seemed to be benefiting "from the reduction in UK fiscal and political risks in the near-term."
British finance minister Rachel Reeves, in November, raised taxes to a post-war high, giving her greater room to meet her deficit-reduction targets.
On top of that, currency volatility is fairly low, making carry trades attractive - these see investors borrow in low-yielding currencies to buy higher-yielding ones, and British rates remain higher than many peers.
As well, Hardman said, "the stronger pound could have been encouraged by recent comments from government officials indicating a desire to return to a closer trading relationship with the EU."
Britain should seek closer alignment with the European single market on an "issue-by-issue" basis when it is in the national interest, Prime Minister Keir Starmer said on Sunday.
Also in the mix, but having little effect on the pound, was data showing Britain's dominant services sector ended 2025 on a weaker footing than previously thought.
(Reporting by Alun JohnEditing by Ros Russell)
Foreign exchange refers to the global marketplace for trading national currencies against one another. It is essential for international trade and investment.
Currency volatility is the degree of variation in the exchange rate of a currency over time. High volatility indicates significant fluctuations, which can impact trade and investment decisions.
Interest rates are the cost of borrowing money or the return on savings, expressed as a percentage of the principal amount. They are influenced by central bank policies and economic conditions.
Brexit refers to the United Kingdom's decision to leave the European Union, which has significant implications for trade, economic policies, and regulatory frameworks.
Investor sentiment is the overall attitude of investors toward a particular market or asset, often influenced by news, events, and economic indicators.
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