By Ritvik Carvalho
LONDON (Reuters) -Sterling steadied above $1.41 on Tuesday after posting its best day against a weakening dollar at the start of the week, buoyed by market relief over the Scottish election results, improved economic forecasts, and lockdown easing measures.
Analysts say the election outcome - in which the Scottish National Party did not secure an outright majority - was a relief for the currency, which had been trading away from its fair value against the euro owing to the election uncertainty.
Pro-independence parties together won a majority in Scotland's parliament on Saturday, which Scottish leader Nicola Sturgeon said gave her a mandate to pursue plans for a second independence referendum.
Any second referendum on Scottish independence requires the approval of the British government and Prime Minister Boris Johnson has ruled this out.
"As we have argued previously, the Scottish elections were not supposed to have a long-lasting negative impact on the pound and the pound rally yesterday provided a case in point," said Petr Krpata, chief EMEA FX and IR strategist at ING.
"With the UK government confirming the next step of the reopening of the economy, the solid UK data points this quarter should benefit sterling."
By 1525 GMT, sterling was 0.2% higher against the dollar at $1.4152, just shy of the 2-1/2-month peak of $1.4158 hit on Monday.
Against the euro, the pound traded 0.1% lower at 85.97 pence, off a one-month high of 85.88 pence per euro touched on Monday.
"Euro-sterling moved a full figure lower yesterday to below 86 pence, as investors moved beyond the Scottish Parliament election," said Mikael Olai Milhøj, chief analyst at Danske Bank. "Another Scottish independence referendum is far away and hence not something markets will trade on near-term."
Sterling is the third best performing G10 currency against the U.S. dollar year-to-date, trailing the commodity-linked Norwegian crown and the Canadian dollar. As of the end of Monday, sterling was up 3.4% this year against the greenback.
The pound has also benefited from the Bank of England beginning to taper its bond purchasing programme last week, on the back of an improving economic outlook.
Prime Minister Boris Johnson confirmed on Monday that England could continue to the next stage of his four-step plan to bring the country out of lockdown by the summer, as the COVID-19 situation has improved thanks to the rollout of vaccines and social restriction measures.
CFTC positioning data showed speculators reduced their net long position on the pound in the week to May 4.
CitiFX analyst Adam Pickett said a UK reopening is "far from priced in" despite "vaccine exceptionalism", noting that the pound against the dollar looked underpriced relative to a proprietary "UK reopening" basket.
"This comes despite the UK reopening timeline remaining unchanged despite delays elsewhere in G10. The UK should also retain its position as a COVID recovery play given the autumn timeline for booster shots and leadership in mutation sequencing," Pickett said.