The pound has climbed to its strongest level against a basket of other currencies since the day of the EU referendum more than five years ago. Bank of England data published on Thursday showed the milestone was reached on Wednesday, taking sterling back above where it stood in the hours after the 23 June 2016 vote.

Why sterling rallied

The gain came in the aftermath of the US midterm elections, where the Democrats' victory triggered a risk-on rally that moved money out of the dollar and into other currencies. Sterling's rise also reflects its own recent strength against currencies including the euro and the yen.

A further support came from expectations that the Bank of England would raise interest rates for the first time in more than three years at midday on Thursday. Higher rates would make it more lucrative for investors to hold funds in sterling.

What the index shows

The high was recorded in the Bank's sterling effective exchange rate index (EERI), which tracks the pound against a basket of other currencies. Calculated by the Bank of England, the index has now hit 86.5372, where 100 equals the value of the pound in January 2005.

• •The referendum result pulled the EERI down to 84.441, from 87.9248 on the day of the vote
• •In 2016 the pound also hit a 31-year low against the dollar in the hours after the result
• •During the Covid pandemic the index fell as low as 73.1 on 23 March 2020

Dollar, euro and stock markets

By Thursday the pound dollar rate had steadied: after Wednesday's rise of more than half a cent, sterling sat unchanged at $1.3463. Its pound euro rate slipped a little to €1.1985, having earlier in the autumn gone past €1.20 - an 18-month high at the end of October.

Equities in Europe followed US markets higher after Donald Trump's defeat in the midterms. In Thursday morning trade, the FTSE 100 and Germany's Dax each put on 0.6% and France's Cac 40 rose 0.8%.

Market reaction in quotes

Jim Reid of Deutsche Bank said the outcome reduced political uncertainty. "When it came to the market reaction, there was relief among investors that the results weren't disputed," he said, adding that the prospect of divided government eased concerns about the fiscal trajectory, given it will now be harder to pass tax cuts or spending packages.

Ajith Nair, chief investment officer of Isio Investment Management, said the immediate reaction had clearly been positive, offering respite after the recent wobble in AI-related stocks. But he cautioned investors against getting too comfortable. "A more challenging Congress does not mean the president is powerless, particularly when it comes to trade and foreign policy," he said, warning that an assumption of two relatively uneventful years from Washington could still be tested.

Attention now turns to the Bank of England's interest rate decision, due at midday on Thursday.