Sterling posts biggest weekly gain in 12 weeks as UK political risk eases

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Sterling posts biggest weekly gain

Highlights

Sterling rises 0.1% to $1.3357 on Friday, completing a 1.2% weekly gain for its largest advance against the dollar in 12 weeks.
Reduced UK political risk follows Andy Burnham's support for existing fiscal rules, removing risk premium and stabilizing sterling in currency markets.
Bank of England rate-setter Catherine Mann signals willingness to hike rates if inflation risks persist, with money market futures pricing a 70% chance of a rate hike by year-end.

Sterling gains on policy and political signals

As reported by Reuters, sterling is up 0.1% at $1.3357 on Friday, taking its weekly advance to 1.2% and putting it on course for its biggest weekly jump against the dollar in 12 weeks.

The dollar retreats after the U.S. adds fewer jobs than expected last month, tempering expectations for further Federal Reserve rate hikes. At the same time, concerns in British markets over domestic politics have eased after Andy Burnham, who has said he wants to replace outgoing Prime Minister Keir Starmer, reassures investors with his commitment to the country's existing fiscal rules.

Karl Steiner, head of analysis at SEB, says some risk premium is leaving sterling, helping the currency strengthen. Investors had been unsettled by Burnham's earlier remarks about moving beyond being "in hock to the bond markets", but markets are now taking comfort from his backing for rules that require day-to-day spending to be balanced with tax revenues and for debt to fall as a share of output.

Bank of England outlook supports the pound

Against the euro, the pound is slightly weaker at 85.73 pence, after touching its strongest level against the single currency in a year on Thursday at 85.47 pence.

Markets are still pricing a greater chance of a Bank of England rate hike than a rate cut this year, despite easing hostilities in Iran and the gradual resumption of oil supplies from the Middle East. On Thursday, Bank of England rate-setter Catherine Mann says looser financial conditions since the June rate meeting will be a key factor in her decision at the July meeting.

In her speech, Mann says she is prepared to vote for a rate rise if higher inflation expectations following the U.S.-Iran war reduce the likelihood of inflation returning to the central bank's 2% target. Commonwealth Bank of Australia currency strategist Carol Kong says Mann's comments underpin sterling, while money market futures imply about a 70% chance of a rate hike by year-end. Before the Middle East conflict, investors had expected the Bank of England to cut rates twice in 2026.

Our earlier report on Andy Burnham’s fiscal stance during the Labour leadership transition outlined his pledge to keep a tight grip on UK public finances if he becomes prime minister. We noted his commitment to Labour’s 2024 manifesto tax promises, alongside plans to fully fund a new defence investment programme while pursuing housing and utility reforms within a disciplined budget framework.

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