Sterling Strengthens on Rate Hike Bets

The pound held firm above $1.34, trading at its highest since mid-June, and near a one-year peak against the euro. The currency’s resilience stems from expectations of higher UK interest rates and reduced domestic political uncertainty, while investors also anticipate closer UK-EU ties ahead of next week’s summit. Rising Middle East tensions have pushed oil prices to one-month highs, reinforcing bets on Bank of England rate hikes. Markets now fully price in a November increase, with a second expected by March 2027. Political focus shifts to Andy Burnham’s likely appointment as prime minister on July 20. Investors are watching his choice for finance minister, with Foreign Secretary Yvette Cooper now favored over Ed Miliband, who is seen as more fiscally expansionary.

The pound rose to $1.34, returning to mid-June levels, as investors turned their attention to UK politics. Andy Burnham, set to replace Keir Starmer as prime minister on July 20, and his choice of finance minister are now in the spotlight. Betting markets currently favor Ed Miliband, widely viewed as fiscally expansive, for the role. Investors also weighed escalating Middle East tensions, rising oil prices, and inflation concerns. The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping, heightening uncertainty over energy flows. Markets responded by pricing in further Bank of England rate hikes, nearly fully expecting two increases in 2026, with a September hike now fully priced in. In the US, softer June inflation data eased Fed rate hike pressure, though Governor Christopher Waller warned of possible action if inflation stays above 2%.

The pound traded at $1.335, retreating from recent three-week highs, as investors assessed escalating Middle East tensions, rising oil prices, and concerns about inflation’s impact on monetary policy and economic growth. The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping and proposed a 20% fee to guard the Strait of Hormuz, increasing uncertainty over energy flows. Markets responded by pricing in further Bank of England rate hikes, nearly fully expecting two increases in 2026, with a September hike now fully priced in. In the US, Fed Governor Christopher Waller warned that the central bank may need to raise rates "in the near term" if inflation remains above the 2% target. Politically, Andy Burnham is set to become the new Labour leader when the leadership contest ends on Friday and is expected to be officially appointed as prime minister next Monday.