The pound hit a four-month high against the dollar this morning, carried higher by a wave of European optimism after it emerged things are looking up for Angela Merkel.
The pound rose 0.7 per cent to $1.3635 against the dollar in late morning trading, following in the footsteps of the euro, which was up 0.8 per cent against the currency at $1.2126, a three-year high..
The dollar's weakness followed a breakthrough in coalition talks between Merkel's Christian Democrat Union and the Social Democrats after 24 hours of solid negotiation, which meant the pair can move to the next stage.
The good news followed encouraging minutes from the European Central Bank yesterday, which showed the bank's policymakers expect a "prolonged period" of above-potential growth.
"While we were expecting stability [between the euro and the dollar] around the 1.20 level over the coming months – given the lack of obvious directional catalysts - yesterday's hawkish ECB minutes were a bit of a curveball," said Viraj Patel, foreign exchange strategist at ING.
"Still muted Eurozone inflation data and the run-up to the Italian elections 'should' act as limiting factors for the euro – although, in a weak dollar environment, further euro-dollar upside cannot be ruled out," he added.
"All of this means that we’re looking for [the euro] to gravitate towards $1.30 by end-2018... it’s more a question of how, not if, we get there."
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