Sterling was well supported today after rising overnight to above $1.35 as investors rushed to unwind bets on a weaker pound after a resounding election victory by Prime Minister Boris Johnson's Conservative Party.
Boris Johnson's win will allow him to end three years of political paralysis and take Britain out of the European Union in an orderly manner in a matter of weeks.
The pound was last trading up 0.9% at $1.334, giving up some of the gains it made overnight when it surged to a 19-month high of $1.3516.
Against the euro, the pound was up 0.3% at 83.3 pence, having skyrocketed to a three and a half year high of 82.78 pence.
It had jumped more than 2.5% after exit polls pointing to the scale of the Conservatives' win were published, its biggest one-day gain in nearly three years.
This was a remarkable jump for a currency that has become extremely volatile since Britain voted to leave the EU in a referendum in 2016.
Analysts said they believed sterling could rise to $1.40 as there was a chance Johnson could now seek to extend the post-Brexit transition period beyond December 2020 in order to complete negotiations on a future trade deal with the EU.
During the election campaign, the prime minister had pledged not to do this.
Analysts from HSBC expect sterling to rise to $1.45 and to 76 pence against the euro by the end of next year, now that the "politically driven undervaluation" has been removed.
It had previously forecast targets of $1.37 and 80 pence.
Sterling strengthens on Conservatives' election victory pic.twitter.com/rP0MvLvAPh— RTÉ Business (@RTEbusiness) December 13, 2019
Meanwhile, expectations of aggressive rate cuts by the Bank of England were also scaled back as investors bet the lifting of political uncertainty would prompt policymakers to take a more optimistic view of the economy.
"The potential for a smooth Brexit removes some of the downside risk for the UK economy, and this should be positive for both business and consumer confidence," said Guy Foster, head of research at wealth manager Brewin Dolphin.