Sterling holds near one-year euro high as rate hike bets support UK currency

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Sterling near euro high

Highlights

Sterling trades at 85.28 pence per euro, near its June 2023 high of 85.09, supported by expectations of higher UK interest rates.
Money markets fully price a Bank of England rate hike by November and a second by March 2027 due to Middle East tensions and rising oil prices.
Political shifts with Andy Burnham set to become Labour leader and PM on July 20, and finance minister selection, add focus given Britain's fragile public finances.

Rate outlook underpins sterling demand

As reported by Reuters, the pound is flat on the day at 85.28 pence against the euro, close to last week's level of 85.09 pence, which marks its strongest point since June last year. Sterling is also little changed against the dollar at $1.3391 after rising in the previous session when a softer U.S. inflation reading weighs on the U.S. currency.

The latest escalation of hostilities in the Middle East prompts investors to add to bets on Bank of England rate hikes this year because of the expected inflationary effect of higher oil prices. Money markets are fully pricing in an increase by the November policy meeting, with a second rise priced in by March 2027.

Chris Turner, head of global markets at ING, says relatively high interest rates are keeping sterling supported. He adds that the upcoming EU-UK summit may also generate modest gains for the currency, making it difficult to argue for a lower pound for now.

Political transition and external factors shape outlook

Before the U.S.-Israeli war with Iran, investors had expected the Bank of England to cut interest rates twice this year. That shift in market pricing now adds to broader support for sterling alongside takeover activity involving British companies and signs of economic resilience.

Attention is also turning to UK politics, with Andy Burnham expected to be formally announced as Labour leader on Friday and officially named prime minister on July 20. His choice of finance minister is in focus because of Britain's fragile public finances, while current finance minister Rachel Reeves continues to stress the need for fiscal stability and betting markets now place Foreign Secretary Yvette Cooper as the leading candidate.

Our previous report on Andy Burnham’s uncontested Labour succession explained how party backing effectively cleared the field, paving the way for a swift handover in Downing Street. We also highlighted the key policy focus for markets: uncertainty over who will shape UK fiscal policy as Burnham takes office, including questions around whether Rachel Reeves would remain chancellor and how the new leadership might approach financial regulation.

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