Sterling touched $1.345 and hit its strongest level against the euro in a year as traders weighed Bank of England rate expectations, higher oil prices and UK political developments.
Sterling rose to nearly a one-month high against the dollar and a one-year peak versus the euro on Friday, as markets assessed the likely response of major central banks to higher energy prices linked to the U.S.-Israeli war with Iran. The pound touched $1.345, its highest since June 15, and was last up 0.1%, while the euro fell to 85.18 pence before trimming losses to trade flat. Recent strength in the pound has been attributed to a mix of better-than-expected UK growth, foreign takeovers of British companies, reduced political instability and Bank of England policy expectations. Monex Europe senior FX strategist Barry van der Laan said comments from Bank of England chief economist Huw Pill that interest rates will have to rise reinforced the view that the BoE has less scope than the Federal Reserve or the European Central Bank to look through inflation. The backdrop has shifted as oil prices climbed about 5% this week after the U.S. and Iran traded strikes and the U.S. cancelled an Iranian oil trading waiver, although Brent crude was roughly flat at $76 a barrel and still far below April's high of $126. Britain, as a major energy importer, remains sensitive to oil moves, even as the International Monetary Fund this week upgraded its UK growth outlook and said Britain would be the third-fastest growing G7 economy this year behind Canada and the U.S. Political clarity has also supported sentiment after former Greater Manchester mayor Andy Burnham won the backing of most Labour lawmakers to replace Keir Starmer, though analysts caution markets could turn more turbulent once he begins setting out economic policies.